Golden Cross of Taiwan Onshore/Offshore Mutual Funds -Bond ETF and Target Maturity Bond Fund Are Hot
Updated: Sep 8, 2021
In Aug 2019, the onshore fund size the first time surpassed that of offshore funds since 2008, reversed the imbalance status quo and long-standing phenomenon appeared in Taiwan that offshore funds dominate the majority of the fund market. After Taiwan Financial Supervisory Commission (“FSC”) implemented the Master Agent scheme in Mar 2006, offshore funds grew their assets advanced onshore funds all the way. In 2008, the offshore funds’ size slumped 52% in a single year because investors worried about the financial turmoil and redeemed the overseas cash back. Apart from that particular year, onshore funds never come into investors’ favor. Over the past ten years, asset of offshore funds grew in the rate of 15.57% per annum while onshore funds performed very calmly, till Bond ETF changed the fate of local Securities and Investment Trust Enterprises (“SITE”) in 2017. Onshore funds started to escalate their asset under management in the rate close to 10% per annum in the year 2017 and 2018, and went to its peak of USD129,751 in 2019 Nov, YOY 53.87%!
Exhibition 1: Golden Cross of Onshore & Offshore funds
It is primarily that Bond ETF and Target Maturity Bond funds (“TMF”) boost asset skyrocket of onshore funds and make history for the onshore funds’ explosion. According to the data of SITCA, as of Nov 2019, Bond ETF dominates 33% of the total onshore fund assets while TMFs accounts for 8%. Most notably, their history is short in Taiwan. The two segments started to show their appearance very recently, in 2017 and 2016 Aug.
1. Bond ETF
In reality, the success of Bond ETFs in Taiwan is an exceptional case as life insurers are binged on Bond ETFs, which irritates Taiwan financial regulator already. Vast assets swung into Bond ETFs over the past two years, driving onshore fund size jumped to the record high. Taiwan FSC no longer allows domestic SITEs to launch Bond ETFs and TMFs consecutively. This is to mitigate the overwhelming growth of the said funds. (for more stories about Bond ETFs in Taiwan, please refer to NIC Insights: Bond ETFs in Taiwan, the day after tomorrow)
2. Target Maturity Bond Fund
TMF showed its appearance in Taiwan in Aug 2016 since Schroders launched its first TMF, raising USD120 million. Invesco entered the space in 2017. More and more SITEs joined the fray. As of Nov 2019, there are totally 79 TMFs in the market, USD 10.26 billion in combined assets. Compared that to USD 4.65 billion in 2018 with 38 TMFs, the assets soared significantly 121% in a single year.
Exhibition 2: Growth of Target Maturity Bond Funds
(NIC has surveyed the TMFs development in Taiwan as of 2018 earlier, please check our Insight at Target Maturity Bond Fund Boost Taiwan Onshore Fund Market)
TMFs are not new products; however, the regular income and attractive yield lifted the popularity for Taiwan investors. Particularly, supported by the strong sales force of insurance companies, in the case that Insurance companies issue saving insurance policies linked to a specific TMF to guarantee the maturity date, TMFs become the best seller in recently years.
Notably, there are certain special characteristics of TMFs in Taiwan.
1) Target Maturity Bond Fund can’t overweight high yield bonds and tends to Emerging Market (“EM”) bond funds. Since the product is designed in the concept of being matured at a target date, which appeals to capital preservation and safety, it can’t expose to over 30% high yield bonds in the portfolio . Initially the fund manager can allocate bonds with maturity date later than the fund maturity. For the sake of managing the maturity risk, FSC just very recently placed the cap that the exposure of bonds that mature one year earlier than the fund maturity shall be more than 60% of the total assets.
2) In Taiwan, the insurance platform is one of the key elements which drives TMFs’ hot sales. Hence most of TMFs are designed to be matured at 6 years, matching the tenor of savings insurance plan. 6-year funds account for nearly 60% of the total TMFs. Few TMFs are designed to mature more than 6 years, i.e. Fuh Hwa 10 Year Maturity Emerging Market Bond fund and Invesco Fixed Maturity Selective Emerging Market Bond fund, the largest two TMFs ranked over the 76 TMFs as of 2019 Nov, are outstanding to accumulate USD 427 Million and USD 396 Million separately. Both of the abovesaid funds are in relation to the saving plans of Nanshan Life. The most statistics states Nanshan Life, BNP Paribas, and Taiwan Life are the three main forces to distribute hot-selling TMFs.
Exhibition 3: Maturity distributions of TMFs
3) According the SITCA as of Nov 2019, the top 10 SITEs issuing TMFs are ranked as below. Compared to the ranking in 2018 end, Invesco and Schroders continue to occupy the market, in terms of the TMF AUM or the fund numbers. The rest 18 SITEs scaled less in TMF segment but ran after closely. The competition is still fierce with more SITEs joining the space. For instance, Esterspring just launched its first TMF in Feb 2019 (and the second and third in Aug 2019), with its differentiated product design, 3-6 year triggered maturity, it became the 4th largest TMF SITE in Taiwan.
Table 1: TOP 10 TMF Fund houses
4) It’s not the surprise news anymore that Taiwanese investors are fond of EM funds. EM sectors accounts for 14.19% of total onshore funds and 17.11% of total offshore funds. This concentration phenomenon is even obvious In TMF sector. In total, 73 out of 76 TMFs are EM funds. In the situation that more of the funds concentrate on the same topic, SITEs started to slightly post various themes on the EM portfolios, such as senior secured bonds, ladder maturity, triggered maturity, real assets, ESG or regional themes, etc., to differentiate their products.
NIC continues to explore the most favored products by Taiwan investors. We need innovative asst management partners to join the fray. Welcome to come to us. Let’s brainstorming together and kick out the market!