Fund Frenzy Hits Korea

Cleaned-up brokerages have won back retail investors' trust

Last March, Kim Tae Hyun, a 29-year-old software engineer, fretted about being able to save up enough money for his 2006 wedding. So instead of keeping his cash locked up in a typical low-yield bank account, he moved about 40% of his $39,000 in savings into a stock investment fund offered by his bank. Since then the Korean stock market has surged, and Kim figures he has earned about 8%. "I definitely needed a better return," he says with a grin.

Kim is one of more than one million South Koreans who have started up new share-based investment trust accounts in the past year -- the bulk of them in the past six months. The renewed interest among individual investors is helping to drive a sustained rally in Korean shares. The combined market capitalization of the Korea Stock Exchange and tech-heavy Kosdaq hit a record $507 billion on Feb. 28. The benchmark Kospi index has jumped over 10% so far this year and the Kosdaq some 30%, making them among the world's best-performing bourses.

But wait a minute. Weren't Korean stocks among the worst performers of the past two years? And aren't investors in Korea traditionally seeking a quick buck when it comes to the equity market? Well, yes and yes. But investment pros say that's all changing thanks to a combination of improved corporate governance at brokerages -- once notorious for churning clients' portfolios -- improved profitability at blue-chip companies such as Samsung Electronics and Hyundai Motor, and an increased concern on the part of investors about building a retirement nest egg. "We are at a major turning point," says Park Kyung Min, chief executive of Hangaram Investment Management Co. in Seoul. "There are similarities between our situation now and that in the U.S. in the 1980s, when retail money began flowing into mutual funds."

Indeed, there are signs aplenty that Korea's money-management industry is regaining the trust of retail investors. That comes six years after Daewoo Group, then Korea's second-largest conglomerate, went belly up, leaving millions of Koreans holding the bag for huge losses. The three largest investment-trust companies had invested heavily in high-yield Daewoo debt securities and other dubious loans. Now they are all undergoing changes in management. Hyundai Investment Trust & Securities Co. has been taken over by America's Prudential Financial Inc. (PRU ), and the other two, Korea Investment & Securities Co. and Daehan Investment & Securities Co., are expected to be sold to local financial institutions this June. Since 1999 the state has injected $10 billion into the former Big Three to rescue the savings of small investors.


What's more, less than a third of Korean mutual-fund money is now invested in the Big Three. Instead Koreans are flocking to brokers with cleaner images and savvy marketing campaigns. Institutions such as Kookmin Bank also have started to sell more retail products, such as stock investment funds, to reduce their reliance on the corporate loan business. Kookmin has opened more than 450,000 accounts worth some $1.1 billion since January, 2004. All in all, money is rolling back into equity investments, helping to push funds under management to an estimated $204 billion this year, up from $140 billion just two years ago, according to Korea's Asset Management Assn. "For the first time in our history, Koreans are volunteering to be long-term investors," says Kang Shin Woo, chief investment officer at PCA Investment Trust Management Co.

To be sure, investing in Korea's equity markets is anything but a sure thing. And it remains to be seen how investors would react to an extended slump. New worries about neighbor North Korea's suspected nuclear-arms program could push share prices down, especially if the Bush Administration steps up the rhetoric against Pyongyang. Corporate earnings are under threat from a stronger currency, and the overall economic outlook remains glum because of anemic consumer spending. Koreans may also start to chafe under the high fees levied by most stock investment funds. Retail investors often pay up to 2.5% in annual fees for equity management, far above the average 0.8% for bond funds.

Still, the growing "buy-and-hold" mentality taking root among individual investors in Korea will continue to buoy the Kospi for a while to come. Institutional and foreign investors are also expected to pile in. That's because Korean stocks remain a relative bargain even after the big gains so far this year. Price-earnings ratios average 7.9 for Kospi stocks, compared with 16 for U.S. companies, 15.9 in Japan, and 10.6 in China. Another favorable sign for the market: Korea's National Pension Fund, which manages $127 billon, has set a goal of increasing its exposure to stocks from the current 8% to 10.7% by 2009. By then assets under management at the state fund are expected to more than double, to $289 billion. And Korea is due to introduce a 401(k)-style corporate pension scheme by December that will probably drive up stock investment. "There's certainly potential for the Korean market to make a big leap forward," says Ko Kwang Soo, a research fellow at Korea Securities Research Institute. That could mean an extended financial honeymoon for newlywed Kim Tae Hyun.

By Moon Ihlwan in Seoul

    Before it's here, it's on the Bloomberg Terminal.