Things to know before designing product for Taiwan! -Product Design in Taiwan 101-
Updated: Sep 8, 2021
NIC was assisting our partners with advisory business recently, and we find it important to share some observations to help our partners understand why and how the advisory business work this way in Taiwan. Some definitions/rules might be a bit different locally, so adjustments are needed for our partners’ investment ideas to turn into IPO fund ideas in Taiwan.
Bond or Not Bond, that is the question
Bond as an asset type, is quite straight forward at first glance. However, things are a bit different in Taiwan.
Take contingent convertible bond (coco bond) for example. You may think it is classified as bond and of course it is a qualified investment target since convertible bonds are qualified as bond investments, according to Regulations Governing Securities Investment Trust Funds. But the answer is no, coco bond is not a qualified investment target for onshore funds. If one of our partners’ strategy consist a huge portion of coco bonds, the strategy may not be a fit for onshore IPO ideas. Good news is that SITCA and several SITEs in Taiwan have been working on lobbying this issue although it would usually take long time for deregulation.
Another example worth mentioned is preferred shares. In mandarin, the asset sounds more like “preferred stock”, thus it is normally considered as stock asset. However, due to characteristics of preferred shares, some asset managers may consider them more like bonds rather than stocks. Different understanding and classification of asset may cause problems when designing portfolio. Some managers are allowed to invest in preferred shares through fixed income funds, but here in Taiwan, preferred shares are not included in bond fund investment universe.
How do we know if our investment universe lies in qualified investment targets defined by FSC in Taiwan? Some of our partners asked. The trick is that if no one asked FSC, then nobody really knows for sure, unless it’s a common investment target that has possessed a huge amount of investment for years. Here’s a tricky fact: some of the asset managers think coco bond is just another kind of corporate bond and have been investing in coco bonds for years. It was changed after some asset managers asked SITCA to make sure that if coco bond is an eligible investment target that make it certain that it is NOT. It’s not easy to know how to fit in all kinds of investment into Taiwan onshore fund accordingly.
Which category should I fall into
There are three types of bond fund in Taiwan: Investment Grade, High Yield, Emerging Market Bond Fund. Due to the definition of these categories, some portfolio allocation might not lie in any of them.
The Definition for Bond Funds are as bellow:
Investment Grade fund: Investment Grade Investment 80-100% with a limit of 20% in High Yield.
High Yield Bond fund: High Yield investment no less than 60%
Emerging Market Bond Fund: Emerging market bond investment no less than 60%, with a 40% limit in High Yield Investment.
Take a look at your portfolio, does it lie in any one of the above? Do not worry if you find yourselves lie in none of them. It is quite common. NIC have been communicating with our partners and clients trying to make a balanced portfolio that fit in these categories and also maintain the reasonable risk/ reward profile at the same time.
Requirements by SITEs
Each SITE has their own strategy. Some focus on Equity funds with special features, some focus on fixed income. Some of the SITEs consider themselves as a specialist in certain area, while some SITEs are eager to provide all kinds of product. Some SITEs are more like a product provider. The ideas from them are more likely to be channel driven, such as Insurance companies or banks. It would be important to understand the strategy and bring them the exact investment ideas they need.
Internal rules might be implemented by individual SITE as well. For example, according to regulatory, the limit for High Yield bond investment in Emerging bond fund is 40%. However, some SITEs impose an internal control of 30%. It may require additional discussions and adjustments.
Meet everyone’s needs and requirements is never easy. Especially when FSC, SITCA, our partners, clients, and investors are all involved. NIC is aiming to provide an efficient solution for our partners. So, please feel free to contact us!