Taiwan regulator moves to correct ‘imbalance’ caused by ETF boom

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Amid the relentless growth of Taiwan’s onshore exchange traded funds market, regulators are trying to promote more active fund capabilities for fear that the industry will start losing stockpicking fund manager talent.

Total assets in Taiwan-listed ETFs now account for 64 per cent of the onshore funds market, up from just 37 per cent in July 2019 after adding NT$4.23tn ($131.4bn) over the past five years.

By comparison, onshore mutual funds, which are mainly active strategies, have added only about NT$840bn in assets over the same period, according to data from the Securities Investment Trust and Consulting Association.

This year to end-July, Taiwanese retail investors have ploughed NT$1.37tn of net inflows into ETFs, compared with net inflows of only NT$27bn for mutual funds.

This article was previously published by Ignites Asia, a title owned by the FT Group.

With Taiwan’s increasingly lopsided growth of passive ETFs and active strategies predicted to continue, the Financial Supervisory Commission has this year begun looking at ways to redress the balance of the industry.

In January, the regulator asked fund houses to foster the growth of actively managed mutual funds to address this “severe imbalance” as part of a proposed “vision” for the mid to long-term development of the local asset management industry.

There should be further development of the active funds industry to “support the training of investment talent and product research and development in Taiwan”, the FSC said.

In April, the FSC excluded ETFs and money market fund assets in assessing whether global fund firms qualify for Deep Cultivation Plan, in which certain fund firms are granted a range of preferential treatment.

All passive funds in May were also excluded from the Incentive Plan for Securities Investment Trust Enterprises, as the regulator tried to give active fund managers a “better chance” of benefiting from preferential measures.

Chiu Jun-mao, professor of finance at Taiwan’s National Sun Yat-sen University, told Ignites Asia that the FSC’s was worried about the cultivation of industry talent, as the shift from mutual funds to ETFs could cause the most promising fund executives to leave active strategy management.

“It takes a long period of time to nurture active fund managers and talents for research and development,” he explained. “Active funds will have to maintain a certain level of AUM in order not to lose talent.”

Improving the research and analytical abilities of active fund managers may also help stabilise the onshore market by reducing the herding effect of retail investors which is “serious and relatively irrational”, according to Chiu.

“Many of them even invest in leveraged ETFs through regular savings plans as they believe it must provide good returns, but they don’t know these products are not designed for long-term investments,” he said.

Yang Chin-Long, governor of the Central Bank of Taiwan, also warned investors to be aware of a “herding effect” amid the fundraising boom for high-dividend ETFs earlier this year.

However, Taiwan’s FSC believes that active ETFs can counter the seemingly unstoppable shift towards passive products. The FSC announced the framework for its new active ETF industry last month and expects the first batch of products to be listed next year at the earliest.

The regulator said in June that 15 out of 38 fund firms in Taiwan are interested in launching active ETFs, with the market estimated to be worth more than NT$200bn by the end of 2025.

*Ignites Asia is a news service published by FT Specialist for professionals working in the asset management industry. Trials and subscriptions are available at ignitesasia.com.