beyondbrics

Domestic fund managers across emerging markets might do well to consider the experience of their counterparts in Taiwan.

Taiwan-based managers have struggled to gain traction due to the popularity of so-called “offshore” managers – registered outside Taiwan by international fund companies – who pay higher fees to distributors and who tend to have better known names, as Glori Ye reports in Monday’s FTfm.

Those offshore funds are competing against both domestic Taiwanese fund companies and international groups based in Taiwan – and all three tend to offer a similar mix of Taiwanese and non-Taiwanese assets.

But the difference is that the offshore funds have more international reach, while the funds based in Taiwan – domestic and foreign – have larger local overheads and cannot afford to be so generous with distribution fees.

Taiwan began allowing the distribution of offshore funds about 20 years ago, but the number of offshore funds at that time was limited.

In August 2006, Taiwan’s Financial Supervisory Commission set up a master agent system, requiring offshore fund managers to appoint a single company to represent them in the offering and sale of their funds.

Master agents find other distribution channels such as banks to sell offshore funds. The combination of the master agent system and the generous fees on offer to the distributors appears to have been a winning combination for the offshore funds. Banks now account for 80 per cent of the distribution of offshore funds in Taiwan by asset volume and just 50 per cent for onshore funds.

By the end of November 550 Taiwan-based funds had assets under management of T$1,900bn ($64.7bn) against 1,013 offshore funds with T$2,400bn.

Liu Tsung Sheng, Taipei-based president and chief executive of Polaris International Securities Investment Trust says the system has not been good for the funds industry in Taiwan.

“Master agents only do pure distribution without any custody, clearing and settlement business in Taiwan,” says Liu. In effect, offshore funds only take out Taiwanese investors’ money without investing in infrastructure, resources or manpower.

Rosemary Wang, deputy director general of the FSC’s Securities and Futures Bureau, thinks the success of the offshore funds is partly due to the big-name appeal. “It is hard for our domestic fund managers to compete with Fidelity or Franklin Templeton,” she says.

Taiwan is fighting back and from March 2 will require disclosure of all fees awarded to bank distributors to at improve the transparency of the higher fees being paid by offshore funds.

But Liu thinks it is too late. “Even if the FSC starts to protect the onshore funds [now], the current 1,013 offshore funds are still doing well in Taiwan,” he says.

The lesson for other emerging markets? Make sure you create a level playing field for your domestic funds industry before the big names come in and scoop all the business.