Retail investors in Taiwan have been known for their preference tilted to fixed income products with attractive yield for a long period of time, and Target Maturity Bond Fund (TMF) was once a solution for the retail clients who pursue both yield and stability. In our previous insight “Golden Cross of Taiwan Onshore/Offshore Mutual Funds -Bond ETF and Target Maturity Bond Fund Are Hot” in Jan 2020, we introduced the rise and craze of TMF in retail market in 2018 and 2019. How did this sector go since after?
Exhibition 1 – Target Maturity Bond Fund Market (2016 – 2022/06)
Source: SITCA.
* AUM numbers are different from previous article due to change of USD/TWD exchange rate.
Table 1 – Overview of New launch TMF products (2016 – 2022/06)
Source: SITCA.
From Exhibition 1 and Table 1, we could see pace of launching new TMF products slowed down since 2020. Not only number of new funds decreased significantly but also average size of the funds shrunk. Even more, new TMF products were never seen in 2022H1. The headwinds of development of TMF market could be explained by several reasons:
1. Investors’ preference has shifted to equity - Global equity market surged recent years, while performance of fixed income was relatively flat, driving new capital flew into more risky assets. Massive QE policy push the yield of investment grade credit to historical low, so the yield was not attractive anymore for retail investors.
2. Market volatility makes TMF more difficult to achieve target yields in limited time horizon. The primary characteristic of TMF is to invest a pool of bonds with similar maturities, majorly in High Yield bonds and Emerging market bonds. As long as default risk is controlled, TMF is able to handover satisfied target yield. Uncertainty over general market in the past two years turn SITE companies become conservative in the confidence of achieving such mission. Investors are also sitting on the fence.
3. FSC restrictions stop TMFs moving forward –To ease the overheated TMF market, the regulator, Financial Supervisory Commission (FSC), set series of restriction on new TMF products, such as limitation on HY position, which resulted in decrease of yield and dividend of the portfolio. Maturity of every single underlying objects is forced to be consistent with the fund maturity (while in the past, there were room in terms of flexible maturity ranges for the whole fund pool), making Securities Investment Trust Enterprise (SITE) companies difficult to design appropriate products with attractive yield. In Taiwan, most of existing TMF products are tied with Investment Linked Policy (ILP) mandate account. Besides FSC constrains, Insurance bureau also set even stricter conditions for insurance policies linked to TMF. Lack of insurance policy’s support, TMF becomes less lured since after.
Table 2: TOP 10 TMF Fund houses (as of June 2022)
Given above reasons, TMF market was silent for two years. Market share of the players is not much changed. Invesco and Schroders, as first mover and with abundant resources from parent companies, still dominate TMF market with over 40% of market share.
Does it mean this type of product would never back to spotlight? It’s hard to conclude such easily, and according to our observations, we optimistically sense TMF may go for another development in coming years, due to below factors:
1. Market is still under uncertainty – Global market plummeted in 2022 due to the concern of inflation and Ukraine and Russia conflict. Given the uncertainty of the outlook, SITE companies are looking for less risky products, creating opportunities for fixed income strategies.
2. Yield of EMD and IG, which are major components of TMF products, has gone back to attractive level – As of July 20, 2022, Yield to Worst of EMD is 7.355%, close to its peak during the outbreak of COVID and way above average level over recent 5 years; Yield to Worst of Global Aggregate even reached 2.922% and 130 bps higher than COVID period. This gives manager more flexibility to design products with more attractive yield under current regulations.
3. Maturity of existing TMF products is approaching – Table 3 below gives clear evidence that more than 60% of TMF Funds will mature in 2024 and 2025, with almost $6 billion assets liquidated. It’s quite highly possible that SITE companies need to launch new products to reserve the huge capital. As TMF’s AUM are relatively stable, which generates more predictable revenue for SITEs, we believe TMF products will return to glory, falling into SITEs next consideration firmly in pocket.
Table 3: Existing TMF products’ Year of Maturity
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