ETF provider of the year: Yuanta SITC

Asia Risk Awards 2020

Julian Liu, Yuanta SITC

Like other exchange-traded fund (ETF) issuers, Yuanta Securities Investment Trust Company (SITC) faces fee pressures from large competitors that are prepared to charge less to win market share – including the looming danger of zero-fee products that mimic the same return of an index at low cost.

But, unlike other houses, which have responded to these competitive pressures by cutting fees further in order to win more business, the Taiwanese firm has chosen not to participate in this price war. Instead, Yuanta is banking on being able to stand out from the crowd through value-added services, investor education and robust product development.

As part of the broader strategy to produce additional value, the firm has a strong research pipeline, enabling it to enhance operational trading and reporting efficiency and to better understand the needs of the market. One research area that Yuanta commits considerable resources to is artificial intelligence (AI). The firm has 19 listed patents for innovations registered in Taiwan, including an AI-enabled system that facilitates trading orders.

Human and machines: complementary powers

The proprietary AI tools are primarily employed in the back-office functions and dealing rooms at Yuanta. These ‘robo-traders’ help improve the accuracy of order execution. They also free up human staff, who can now engage in operational processes where substantial human judgement is required to bring about differentiation.

While there is often a tendency to associate deep learning with the generation of inexpensive alpha, chairman Julian Liu believes that “simply letting AI simulate financial models and machine processes in the front office, just to cut fees, would stir up a price war in the market”.

When we find an active manager that fails to beat the fee benchmark, it does not make sense to blame that manager, because people are expensive. But humans excel in many areas where machines hit limits

Julian Liu, Yuanta SITC

He adds that there are other ways of bettering the competition than simply focusing on low prices, such as looking at after-fee fund performance or cost-effectiveness.

Liu also avoids using price differentials in order to determine which in-house investment strategy has been the most successful.

“When we find an active manager that fails to beat the fee benchmark, it does not make sense to blame that manager, because people are expensive. But humans excel in many areas where machines hit limits,” says Liu.

For example, while machines are great at executing orders, crunching data and working in back-office operations, humans are better at interacting with investors and offering after-sales service.

Rather than segregating the ETF world into ‘passive’ and ‘active’, Liu prefers instead to combine the positive elements from each: “We aim to streamline the workflow, and ultimately to reduce internal competition, which is critical to lead the whole company to one single destination.”

It was this thinking that led to an internal reform at the ETF provider last year, realigning human resources in order to bring different investing styles and asset classes together. Yuanta’s investment staff are now integrated into one single team to deliver a positive synergy.

Local touch, global reach

As more new entrants have come to the market, offering similar beta products, Yuanta’s market share has taken a hit. From the peak of 40% some years back, the firm now manages around one-third of the entire ETF assets in Taiwan. But, despite its share of the market being diluted, Yuanta still ranks first in secondary market turnover.

Liu says that educating the mass public, building the ecosystem and protecting client interests are at the heart of Yuanta’s business strategy.

“People need to understand a product’s features and risk before investing,” he says. Liu sees this education initiative as a long-term effort, rather than a one-off approach only aimed at boosting sales.

Each year, Yuanta publishes a handful of books aimed at educating ‘mom and pop’ investors on themes ranging from environmental, social and corporate governance (ESG) investing to ‘robo-advisers’ and their application. Rather than just relying on the firm’s strength as a product manufacturer, Liu aims to groom the firm to serve as a one-stop shop for both investment information and product solutions.

For example, it took three years for Yuanta to educate investors about what Liu claims was the first Taiwanese ETF based on ESG investing.

“This is our way to uphold protection for clients,” says Liu.

The Yuanta chairman says that an asset manager focused on product performance may be good at generating fees in the short term, but without also thinking about the product suitability assessment and client education, there is the very real danger of damaging the firm’s reputation and eroding investors’ trust.

Looking ahead, partnership and co-operation continue to be at the core of Yuanta.

This year, the firm has braced itself for post-pandemic opportunities and hurdles by strengthening its internal infrastructure and research capabilities.

Regionally, the firm continues to serve as an adviser on leverage and inverse products to Asian peers. Additionally, the manager looks to explore the possibilities in the ETF market in Singapore, which Liu believes has the potential to emerge as a dominant wealth management hub in the region, as political unrest has chased private investment money out of Hong Kong. Moreover, Singapore is already empowered with sophisticated robo-advisory platforms and a scalable market for real-estate investment trusts, says Liu.