Asia Asset Management held its ninth annual Taiwan roundtable in Taipei on October 17 to discuss the challenges and opportunities institutional investors face worldwide. The event took place in conjunction with AllianceBerstein, Deutsche Asset & Wealth Management, Ping An of China Asset Management (Hong Kong), China Exchanges Services Company, Hang Seng Indexes Company, and Cathay Conning Asset Management (CCAM).
In the first panel discussion, entitled ‘Opportunities in Offshore RMB and RQFII Markets’, Andy Chang, president of Cathay Securities Investment Trust Company, got the ball rolling by pointing out that China recently granted 80 billion RMB (US$12.6 billion) in RQFII quotas to London, noting that the launch of the RQFII scheme, plus the set-up of offshore RMB hubs in Hong Kong, Singapore, Taiwan, and London are prominent features of China paving the way for RMB internationalisation.
According to Richard Li Kun-Chih, head of fixed income and vice president of CTBC Investments Company, London will play a key role among the offshore RMB centres in terms of luring European investors to Asia. In comparison, the situation in Taiwan is relatively uncertain as its RQFII development hinges on the state of its political ties with China.
Henry Hui, head of product development with the China Exchanges Services Company, echoes Mr. Li in saying that London will complement the Asian RMB centres very well because of the time zone difference, plus its proximity to UCITS-compliant funds in Europe, which he expects will lead more of them to access the RQFII scheme. “Many Hong Kong fund managers welcome the expansion of the RQFII programme because it will enlarge the capital pool that makes RQFII products more widely recognised,” he says.
But Mr. Hui also plays down the impact of London on the Asian RMB hubs saying that these European investors will demand RQFII ETFs and derivatives in Asia to hedge their positions.
Hayden Briscoe, director of Asia Pacific fixed income with AllianceBerstein, states that while China strives to set up a regulatory platform to facilitate the inflow of foreign capital, the retention of overseas investment in China remains an issue. He believes that RQFII scheme quotas will eventually disappear as the Chinese market opening expands.
Angel Lee, director and head of sales, global business development with Ping An of China Asset Management (Hong Kong) Company Limited, says she welcomes more cities joining the RQFII plan because this will expedite investors to get more familiar with the QFII-affiliated programme: “With foreign ownership of Mainland sovereign bonds remaining very low, the RQFII programme holds the promise of raising the proportion of foreign participants as well as propelling RMB internationalisation which, in turn, will ultimately benefit the growth of the Mainland’s capital market.”
She notes that Ping An will draw down its newly-received RQFII quota to launch a pure bond fund. However, given the relatively high RMB savings rate, it is very challenging for RQFII fixed-income managers to structure in duration and total returns for their bond portfolios in order to attract yield seekers.
Vincent Kwan, director and general manager of Hang Seng Indexes Company, says Hong Kong still has a significant advantage over other offshore RMB hubs due to its sizeable accumulated RMB deposits.
In the longer run, the performance of the RMB hubs will be heavily reliant on market liquidity and the speed of RMB accumulation. For example, Taiwan might have the edge in this regard when one bears in mind that its total cross-strait trading value is three times that between Hong Kong and China.
Competition between RQFII participants has been heating up since the Chinese regulator awarded RQFII licenses to the first batch of Hong Kong-based institutions earlier this year. As Ms. Lee sees it, Mainland players have the advantage in A-share stock picking; but Hong Kong-based entities are more experienced in operating mutual funds that can offer tailor-made solutions to their clients.
From the foreign institutional standpoint, Mr. Briscoe claims that AllianceBerstein is in a unique position with its onshore and offshore capabilities. The company has managed QFII mandates and dim sum bond funds for years. “Retail investors are building these pools up, predominately in Taiwan and Hong Kong. But in the future, trends will be institutionally driven. We believe our company can bring more global institutional clients to the onshore market,” he says.
Mr. Li points out Hong Kong players, such as HSBC, have the edge over their rivals with their strong distribution channels. By contrast, he says, Mainland RQFII ETFs may find it difficult to secure significant market share because of the homogeneity of their products.
In face of this stiff competition, newcomers will have to work with index providers to launch ETFs, which feature a wider coverage of the equities market. For example, small- and mid-cap A-share equities outperformed the market this year. And in Mr. Li’s opinion, new participants should evaluate the possibility of launching index products with a broader constituent base.
Mr. Briscoe notes an important nuance, namely that the QFII scheme stipulates that foreign investors have asset allocations linked to a specific investment plan that may not be conducive to furthering global investments onshore. Rather, this group of investors would prefer to have the flexibility to transfer quotas between different plans. He reckons that this, together with the miniature QFII quotas, will divert some QFII investors to the RQFII programme.
“Our current QFII global clients will be looking to RQFII quotas as a better way to make asset allocation decisions, because they are currently forced to have a minimum 50% allocation to equities. I think the larger flows will come from global bond investors looking for allocations to Chinese government bonds in particular,” he notes.
According to Mr. Hui, RQFII participants’ wagers on derivative tools, such as futures, are restricted. They are only allowed to invest in CSI 300 futures for hedging purposes. Nevertheless, expectations are that this restriction will be further relaxed going forward, allowing those participating to access various index futures and options.
Investing in real assets
In terms of real asset investments, Sun Hao, managing director and head of institutions, Greater China with AllianceBerstein, says that real assets have been growing in popularity among global investors in view of the high returns they offer. In addition, investors tend to use real assets for risk diversification because of their low correlation with conventional investment tools, plus their inflation/deflation hedging capability.
Mr. Sun believes that the securitisation of real assets has come into play to drive up market demand. In the past, manufacturers and producers were the major buyers of real asset futures, driven by the need to hedge against their risk positions. At present, however, more new buyers are real asset investors, which is underscored by the fact that the trading volume of real asset derivatives has significantly surpassed the volume of their underlying assets.
According to William Leung, senior vice president and portfolio manager at Cohen & Steers Asia, the real asset segment remains a relatively new concept for Asian investors, certainly in comparison to Western pension and endowment funds. He says: “Although some asset managers in Australia and Japan have developed exposure to real assets, they only focus on the individual asset class. The next stage will see investors building up their portfolios, incorporating a wide array of real assets.”
Mr. Leung also notes that various real assets performed in different ways during previous inflation cycles. For example, commodities were the stellar performers in periods of accelerating inflation over the last 38 years, whereas REITs outgrew their counterparts in the countervailing phases of easing inflation.
Tom Wu, assistant vice president and fund manager at Yuanta Securities Investment Trust Company (Yuanta SITC), emphasises that inflation is a critical factor in determining market demand for commodities. As such, investors should be keenly aware of the inflationary pressures in play, along with stock market dips, and the stringent monetary measures engendered by QE tapering.
Pointing to real estate investment, Mr. Wu says that REITs can offer investors an attractive access to property markets given that property trusts delivered a historical return of around 50% during the rising interest cycles. This compares favourably with the returns of about 30% seen in the equities market.
According to Donna Chen, managing director of Keystone Intelligence, REITs and properties have become an increasingly important asset class to Taiwanese investors. Taiwanese pensions, along with onshore and offshore mutual funds, invest as much as NT$70 billion (US$2.3 billion) in the real estate segment. Of these, some NT$36 billion was sourced from the external mandates of the Labor Pension Fund (LPF).
Mr. Leung opines that the duration of a property cycle is about six years. Thus he is overweight in the US and continental Europe as these markets are in the early stages of this cycle. However, by the same thesis he is avoiding Hong Kong and Singapore due to those markets’ overshoot in terms of housing prices and oversupply.
Among the wider range of real assets, Mr. Wu identifies gold and the consumption end of natural resources, such as steel plates, as his firm’s top picks in the midst of the current US economic and inflation situation.
Mr. Leung echoes this to a degree, confiding that commodities make up of the largest proportion of his portfolio at around 30% because of their sound fundamentals. By comparison, REITs, natural resources, and infrastructure constitute 25%, 20% and 15%, respectively.
Mr. Sun says he favours real estate and gold and is underweight industrial metals in view of the economic slowdown seen emerging markets. So obviously there is no clear-cut consensus.
Taiwan’s largest pension fund, the LPF, is preparing to launch a members’ choice platform. In the third and final panel discussion of the day, pundits shared their views on the hurdles implicit in implementation as well as the retirement system in Taiwan.
Lai Jin-Nan, executive secretary of the supervisory committee managing retirement, compensation, resignation and severance matters for private school teachers and staff at the Pension Fund for Private Schools (PFPS), points out that the PFPS became the first Taiwanese pension to introduce member’s choice in 2013, although it lagged far behind its peers, such as LPF, in launching its defined contribution (DC) plan.
“When the committee thrashed out the DC plan in 2009, we decided to include a NT$20,000 monthly annuity on top of the scheme in order to provide fundamental protection for the membership,” he reports. “Also, the member’s choice platform provides a certain amount of flexibility, allowing them to roll over their contributions after retirement.”
He went on to say that PFPS members are unlikely to pursue knee-jerk fund switching during volatile market conditions because the asset allocation of the fund’s mandates is well diversified, and also the membership mind-set remains very conservative.
Dingyuan Chen, vice chairman of the Pension Fund Association (PFA), Taiwan, remarks that the island’s pension members are not investment-savvy enough to select the optimal fund options. “For example, more than 90% of the PFPS membership prefer to select conservative mandates, even though these provide very low inflation protection. That’s because, by and large, the membership’s lack of understanding affects their risk tolerance,” he says.
To put the LPF’s member’s choice initiative into practice, he believes the Taiwanese government will need to take at least three years to strengthen investment education for fund participants.
According to Mr. Chen, the PFA did propose adding a target-date fund, meaning one which automatically resets the asset mix in its portfolio according to a selected time frame, to local pensions’ product mix so as to provide greater retirement protection to pensioners. However, pension members remain reluctant to accept the fund because of its complicated structure.
Janet Li, a Towers Watson senior investment consultant and director of investment services, notes that the saving rate in Taiwan is in line with its average inflation figures, i.e. at around 1.2%. If pensioners simply leave their savings lying idle in banks or, likewise, heavily allocate their contributions to conservative mandates, the trivial returns produced will be insufficient to meet their needs once they retire.
Julian Liu Tsung-Sheng, president and CEO of Yuanta SITC, is sceptical as to whether the infrastructure and administration platforms are ready for the LPF’s membership’s choices: “Taking the Hong Kong’s Mandatory Provident Fund (MPF) as an example, the retirement programme was launched in 2000; and since then the Mandatory Provident Fund Authority (MPFA) has put substantial resources into investor education and promotion. However, many members were still not very familiar with the Employee Choice Arrangement (ECA) when the scheme was first introduced in November 2012.”
Asked whether the member’s choice management platform should be either single- or multiple-designed, Martin Chen, vice president of the corporate trust department at CTBC Bank, says: “Given that the LPF will open their assets under the DB plan to membership choice in the first place, the pension can delegate the administration to one or two service providers because the aggregate size of the assets they manage is relatively small.
“CTBC Bank has been appointed the trustee bank for PFPS. We’ve developed both a comprehensive network and infrastructure that enables the membership to carry out risk assessment, while allowing them to switch mandates twice a year.”
From the strategic point of view, Mr. Liu concludes that the pension’s portfolio mandates should be well balanced in a structure that combines various investment tools, such as equities, fixed-income, ETFs, and REITs. This ups the opportunity for members to be able to diversify risk more effectively.