Last of Taiwan’s Yield Chasers Seeks Stability as Market DiesJustina Lee
Stone Chang holds a unique position in Taiwan’s bond world. He runs the only fund in the business.
As the island’s interest rates fell over the past decade, 89 of 90 domestic bond funds either shut or shifted their attention overseas. That’s left Chang, 36, the sole investment manager in Taiwan focused on local notes, struggling to boost returns for the NT$3.3 billion ($110 million) Prudential Financial Return Fund he oversees. The prospects of improving the yearly average of 0.6 percent it has handed investors since 2009 are so meager that the goal now is simply to ensure stability, he said.
“Everyone knows there’s no money to be made in local bonds,” Chang, whose assets under management have dwindled from a 10-year high of NT$7.4 billion at the end of 2006, said in a June 5 interview in Taipei. “In the past, there was scope for trading, but then interest rates became so low they couldn’t go lower. So the market really died. I just buy and hold.”
While falling interest rates have accelerated the demise of the industry, the disappearance of so many funds underscores how Taiwan’s relatively young population has little interest in plowing pension savings into bonds. Chang says he has managed to survive because he has a group of clients who want to minimize volatility in their asset prices and avoid the currency risk that comes with investing abroad. Taiwan’s dollar has weakened 0.7 percent this year, more than any other currency in Asia apart from China’s yuan.
Bond-trading volumes in Taiwan shrank 30 percent from 2010 to 2013, GreTai Securities Market data show, as the central bank held its benchmark interest rate at 1.875 percent for 11 straight quarters. The island has the fourth-lowest bond yields in the world, behind Japan, Switzerland and Germany, limiting capital inflows as monetary easing in the U.S. and Europe fuels demand for emerging-market assets. Taiwan’s 10-year government yields moved within a 44-basis-point range in the past year, compared with 54 in South Korea and 90 for U.S. Treasuries.
While funds focused on local debt have vanished, the number buying foreign debt in Taiwan has more than doubled in 10 years to 49, according to the Securities Investment Trust & Consulting Association in Taipei. Chang’s fund, which charges a fee of 0.3 percent of net asset value, returned 0.34 percent last year, the least in a decade, according to Prudential.
Taiwan’s trading volume decline has deterred asset-management companies that face redemption pressure, according to Patrick Liao, a fixed-income manager at Fubon Asset Management Co. in Taipei, which oversees about NT$130 billion. The firm offers 13 bond funds, including eight investing in Chinese notes, but none focused on Taiwan.
“The yield isn’t enough,” Liao said. “Funds don’t have an incentive to invest unless there’s great capital gain potential or a high carry. And Taiwan’s bonds have neither.”
The 10-year government bond yield, which has tumbled 149 basis points in the past decade to 1.55 percent, will stay below 2 percent for at least another 12 months, according to the median of forecasts compiled by Bloomberg. Prudential’s Chang forecasts a yield of 1.7 percent by the year-end. Comparable yields are 2.60 percent and 4.06 percent in the U.S. and China, the world’s two biggest economies.
Chang says yields may start rising in the second half of the year as the U.S. Federal Reserve lifts its benchmark interest rate, allowing central banks around the world to follow without risking currency appreciation that would dent exports.
“Investors will start thinking of the next rate-increase cycle,” he said.
Global funds pumped $15 billion into Taiwanese equities in the past 12 months, prompting policy makers to take action most days to keep the local dollar from gaining too much. Exports rose 1.4 percent in May, the least in four months.
The Fed will raise its benchmark rate in the third quarter of 2015 to 0.5 percent, according to the median estimate in a Bloomberg survey. The target rate has been in a range of zero to 0.25 percent since 2008. Though Taiwan’s inflation rate is the lowest in Asia, policy makers are forecast to increase borrowing costs by 12.5 basis points in the fourth quarter, based on the median estimate in a Bloomberg survey.
Investment choices for the Taiwanese are increasing as President Ma Ying-jeou forges closer ties with neighboring China, which claims Taiwan as its sovereign territory. Following a clearing agreement for yuan in 2012, the island’s deposits of the Chinese currency have risen five-fold over the past year to 288 billion yuan ($46 billion) at the end of April.
Trading volume for Taiwan’s sovereign notes was the equivalent of $1.3 trillion in 2012, GreTai data show. That compares with an Asian Development Bank estimate of $54 trillion for Japan and $7.3 trillion for Germany.
Although bonds in those nations have lower yields, their markets haven’t gone Taiwan’s way because their older populations created more demand from pension funds, said Forest Chen, a Taipei-based economist at Ta Chong Bank Ltd. In Taiwan, 11.6 percent of the population is 65 years or above, whereas in Germany and Japan, the proportion is 20.9 percent and 24.8 percent, respectively, according to the CIA World Factbook.
“The government hopes trading can be more active, but it’s very hard to change the market’s demand and supply,” said Tobby Lin, a bond trader at Yuanta Securities Co. in Taipei who has been in the business for 15 years.
The island limits insurers’ overseas investments to 45 percent of assets, helping keep local yields low. Insurance companies held 25 percent of Taiwan’s government debt as of May 31 and banks owned 48 percent, according to central bank data.
Prudential’s Chang, whose investors include insurers and individuals, has cut his holdings of government notes to 10 percent from 15 percent two years ago, while boosting purchases of higher-yielding corporate debt. Taiwan Power Co., the island’s biggest issuer of such securities, sold 10-year debt on May 15 at 1.95 percent, while the government issued two-year certificates of deposit at a record-low 0.694 percent in May.
“There’s too much money chasing too few assets in Taiwan,” said Fubon’s Liao. “An effective way to tighten funding would be to loosen control of cross-border fund flows. Having more local bond funds is impossible now, and whoever suggests this will get fired.”