She said that Thailand’s regulator is considering a capital gains tax on fixed income funds in order to address an imbalance in the way bonds are taxed.
“Currently if an individual buys a single bond directly, he would be taxed,” Benjarong told FSA. “But if he buys a bond fund the capital gains tax is waived. So from the regulator’s point of view, there shouldn’t be this double standard.”
The tax regime is also a key reason why the feeder fund model, in which a local asset manager wraps an offshore in a local wrapper and distributes it to investors, remains dominant despite the trend in Thailand of relaxing financial regulations.
Last year, regulators allowed HNW investors to buy a foreign fund from their wealth manager without the local wrapper. In principle, the move should cut out the local asset manager. However, not many distributors are adopting the opportunity for these non-feeder fund sales, she said.
Even though the SEC allowed direct investment locally, tax regulations are not moving with it and the feeder fund model will not disappear any time soon, Benjarong said.
“When an investor buys a mutual fund domiciled in Thailand, capital gains tax is exempt,” she explained. “If they buy the global fund [without the local wrapper], they have to pay tax on capital gains.
“There is a way out but it’s not as convenient. If they bring back the capital gains in the next calendar year, it would be tax free. It means the investor really has to time the entrance and exit correctly. If it is taxed, capital gains can be around 30%.”
In Thailand’s total fund market, assets in feeder funds, known officially as “foreign investment funds” (FIFs) grew 15% annually to THB 1.17trn ($37bn) in 2017.
Benjarong estimated that the percent of FIFs of all funds her firm sells to clients is around $4bn or 15% of total assets, which has been on an increasing trend in terms of assets and NAV. The figure excludes fixed income with underlying offshore investments, which local investors tend to use as a substitute for a bank deposit.
Kasikorn works with a number of global managers in a feeder fund arrangement. Most recently it launched funds with Eastspring and Blackrock. She said the number of meetings with foreign managers are increasing, but the bank has no hard number goal to increase FIFs.
“We’ve gone through the stage where we built core products. We are now at the stage with rather complete core product shelf and it’s the satellite product that has been added or any emerging core idea.”
Risk appetite rises
On the product side, Benjarong is responsible for the whole chain, from idea initiation to product filing with the Thai regulator, to product training and maintenance.
Product ideas come from both clients and the market environment, she said. “Thailand is not yet a buyer’s market, it’s a manufacturer’s market. So our job is to find out what can be offered and what will be suitable for a client’s level of sophistication.”
In 2017, with buoyant markets and a capital gains tax on fixed income under consideration, Thai investors liked equity funds.
Higher risk products, such as those focused on geographies where valuations are attractive and equity funds with the ability to short, have gained traction, she said.
“Last year, the market looked like it was going in a positive direction and clients were ready to go higher on the risk ladder.”
Thematic funds such as technology disruption are also in demand, she said. However, ESG-themed funds are not top of list in Thailand.
“We don’t see very high interest from our clients for ESG,” she said. “They still look at performance.”
Even though equities have tended to outperform fixed income, Thailand is still a fixed income market. Given low interest rates, investors often use fixed income as a substitute for a savings deposit, she added.