Shifting demographics exposes the gap for income products

Asian Tigers no more?

Within Asia ex Japan, South Korea, Taiwan, Hong Kong and Singapore also known as the Four Asian Tigers are projected to have the largest share of elderly population by 2050, with more than 4 in 10 persons aged 60 and above.

Changing attitudes and expectations are also evident in these markets. The role of the extended family in providing retirement security has given way to individual responsibility. Around 40% to 60% of the respondents across the adult age groups in these countries expect to be self funding in retirement (see Fig.2).

Given this preference for self-reliance, this same set of respondents expects to receive income from financial assets when retired. This can take the form of bank deposits, insurance or annuity policies and stocks or bonds. Fig.3 shows the current share of income from financial assets for retirees versus the expectations of workers aged 20-59. Across the board, the workers expect to receive more money from the financial assets compared to the retirees. But even more interesting is the significant increase in share of respondents expecting to receive income from stocks or bonds; in Hong Kong and Singapore the expected receipt rate among workers aged 20- 39 rises to 66% and 65% respectively from 30% rate clocked by retirees. Similarly, in South Korea, Singapore and Taiwan there is a dramatic increase in share of respondents (aged 20-39) expecting to receive income from insurance or annuity policies.

Given the survey findings, it is no surprise that income-based investment products have been gaining popularity across the globe. Equally the quest for yield has been underpinned by the low interest rate environment over the past few years. This search for income is likely to remain even when rates nudge upwards, highlighting the huge potential for financial service providers.

Fig.2: Who should bear responsibility for providing income to retirees?³

Fig.3: Respondents who receive or expect to receive some income from financial assets when they retire⁴

It is all about income in Taiwan

In Taiwan, the survey findings show a huge preference for the aged 20-39 to receive payouts by insurance or annuity plans when they retire. This generally ties in with the rationale that as the population ages, investor demand will likely shift away from risky assets and move towards the instruments with stable returns and low volatility. In Taiwan, the evidence is clear; fixed income investments have been beneficiaries. Onshore and offshore fund data show the growing preference of investors towards fixed income products. Over the period shown in Fig.4, fixed income funds’ share of AUM has grown from a mere 1% to 13% for onshore and 39% to 50% for offshore.

High yield bond funds, in particular, have been much sought after; retail investors in Taiwan have poured billions of dollars into high yield bond funds that offer attractive monthly distributions. Investment in high yield bond funds peaked in 2014, accounting for more than one-third of total assets under management of offshore funds. It still dominates fixed income investment in Taiwan but has declined to 25% (as at end April 2018) reflecting growing concerns over the impact of the US rate hikes and the end of quantitative easing later this year by the US Federal Reserve. Cognizant of this risk, many have also reduced their investments in US fixed income funds (declined 8.4% year-to-date as at April 2018) and diversified into European fixed income funds (rose 10% over the stated period).

Nonetheless we believe the demand for fixed income products will continue in Taiwan where household disposable income hit a record high of more than USD505 billion in 2017. This is good news indeed given that a survey⁶ of over 22,000 investors across 30 countries found that people in Asia place the highest priority in investing their disposable income over saving in a bank, purchasing property and paying off debt. Within Asia, Chinese and Taiwanese investors came out tops, 45% of investors in each of these two countries prefer investing, almost double the global average of 23%.

Fig.4: AUM % by fund type in Taiwan⁵