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SFC lifts ban on new foreign equity funds

Motivating the market * The NT dollar has strengthened in recent weeks as global investors have been buying the currency to invest in the local stock market * To encourage selling of the NT dollar, which would relieve the currency's pressure to appreciate, the Securities and Futures Commission has lifted a ban on new local mutual funds that focus on foreign stocks and bonds * The ban was first put in place after the Asian financial crisis weakened the NT dollar by as much as 30 percent

The Securities and Futures Commission (ÃÒ´Á·|) yesterday ended a two-year ban on new local mutual funds that focus on overseas equity investments, and the new policy became effective immediately.

The move follows closely the rapid appreciation of the NT dollar and the eighth successive gain for the TAIEX, which was 150 points shy of the 9,000 mark at the close of trade yesterday.

The lifting of the ban could help reduce pressure on the NT dollar by providing a way for currency to flow out of Taiwan, financial analysts said.

But the commission also set a ceiling of NT$60 billion (US$2 billion) on overseas investments this year. Furthermore, only mutual fund companies that meet strict qualification criteria will be allowed to start the overseas funds. These restrictions are likely to limit any stabilizing effect the funds may have on the NT dollar, analysts said.

The Central Bank of China (¥¡|æ) banned the issuance of new overseas mutual funds after the Asian financial crisis led to the devaluation of most Asian currencies in early 1998.

Since then, 10 mutual fund applications with a total capital of NT$127 billion have been rejected by the securities commission. At the time, the central bank worried that foreign funds would weaken the NT dollar. The currency depreciated more than 30 percent during the crisis, from NT$26 against the US dollar to more than NT$34.

But recently, the situation has changed.

The NT dollar has appreciated over the past few weeks, particularly during the trading sessions on either side of the New Year. The central bank subsequently changed its policy.

Under the policy, any securities investment trust company (SITC) may now apply to start new funds that will invest in foreign stocks or bonds.

But conditions apply.

The investment company must have an operating history of more than two years and have received no punishments for violating securities transaction regulations over the past 12 months.

K.P. Liu (¼B3Í¥-), president of SinoPro Securities Investment Trust, said the restrictions would do little to relieve a fast-rising local currency.

"Foreign investors invested US$10.5 billion in Taiwan's stock market in 1999. This is expected to be even higher this year," Liu said.

"But the central bank only allows for US$2 billion to be invested in foreign markets. Such an unbalanced restriction could create a market expectation that the NT dollar will face further pressure to appreciate this year."

Under the new conditions, only about half of the 32 local fund companies will be qualified to apply for the new foreign funds, analysts said. Just 20 fund companies have been established for more than two years, and several of them received penalties from the securities commission last year.

The regulations also affect foreign companies.

"The condition of the two years' operations record is unfair and discriminatory, especially against the newly established fund companies of foreign fund groups, such as Citibank and Dresdner Thornton (¼w2±)," said a fund company executive, who declined to be named.

"It's protectionism against foreign fund groups," the executive said. "Since Taiwan is very close to entering the WTO, such restrictions are unwarranted. Most foreign fund companies have set up their Taiwan operation in the last 12 months, so the restrictions are clearly aimed at protecting local fund companies.

"Most of these actually lack sophistication and experience in foreign market funds. As a result, Taiwan's consumers will not receive first class service in the provision of a foreign portfolio investment."

Jardine Fleming SITC (©É´I§ë«H), Kwan Hwa SITC (¥úµØ§ë«H) and several other major local fund companies will benefit the most from the new policy.

Presently, Jardine Fleming manages total assets of NT$64 billion, the fourth-largest amount in the fund industry. The total fund size of its five foreign equity funds is the largest of all the local fund companies.

An executive from the company said it is planning to apply for another two foreign funds -- a US technology fund and a global equity fund.

The banking industry will also benefit with its provision of custodian services, analysts said. The custodian fee structure for foreign funds is generally between 0.26 and 0.35 percent of the fund's total assets.

Jardine Fleming's major competitors, including Capital (¸s¯q), President (2Î?@) and Jihsun (?é2±), have been looking to expand their funds in overseas investments for a long time.

As a result, analysts said many qualified fund companies will be competing in the short-term to receive the first applications for offshore investments.

The strong demand could create problems for the securities commission officials if the total fund size of these applications were to quickly exceed the NT$60 billion ceiling.
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