South Korea's Kingpin of Finance
Few other financiers foresaw as clearly as Park Hyeon Joo the carnage that was in store for South Korea when the Asian financial crisis hit a decade ago. Yet out of the crushing recession that followed came opportunity, and Park figured that out as well. Today he's without question the most powerful figure in South Korean finance. And his Mirae Asset Financial Group, founded in the darkest days of 1997, controls 30% of Korea's equity mutual fund industry.
Park's rise from the ashes epitomizes a new retail investment culture that is one of the most promising features of contemporary South Korea. Retail investors, who used to shun shares in favor of bonds and bank deposits, are now flocking to sign up for equity funds, or investment trusts as they are known locally. The total size of those funds, which stood at only $9.3 billion in 2004, has jumped to $78.3 billion. "Mirae Asset has certainly been a catalyst in the boom, and Park deserves credit for that," says Lee Chang Hee, financial analyst at Daiwa Securities.
Mirae has been at the center of three major trends in the Korean capital markets. Park's three-year record of sterling returns has convinced many individual investors that the Seoul Stock Exchange is no longer a rigged game controlled by insiders and the powerful chaebol industrial conglomerates. Stock investors, thanks to Mirae's well-regarded overseas stock funds, are also more comfortable investing overseas in an effort to offset downturns at home.
Opening the Market to Competition
Probably more important is the drive by Park's financial group to push for so-called installment funds that allow salaried workers to set aside a portion of their monthly income for share investment rather than entrusting a lump sum to a wealth management company.
Park, 48, links his success to the 1997 crisis that opened up the Korean market to foreign competition and to globally accepted standards of transparency and investment practices. "I believed restructuring would significantly improve the financial health and return on equity of Korean companies," says Park, who quit as a star broker at a Korean securities firm to set up his own money management company five months before Korea sought a bailout from the International Monetary Fund that year. "I bet on this expected long-term trend," he says.
Wrenching reforms that followed the crisis forced companies to streamline their sprawling businesses, increase transparency to end "creative accounting," and place more emphasis on improving profitability.
Learning Lessons From Foreigners
The result has been a jaw-dropping performance since the early part of this decade. The average return on equity of Korean listed companies has clocked double-digit levels during the past four years, compared to 3.2% in 1996, according to the Korea Development Institute (KDI), a government-funded think tank. "In the past, there was little reason for Koreans to invest in shares," recalls Lim Kyung Mook, capital markets specialist at the institute.
The arrival of foreign players also bought about changes. "Foreign asset managers' longer-term approach sent out signals to the Koreans that yields could be handsome if they parked their money in funds investing in stocks," says Lim. "Tough competition with foreigners certainly laid a basis for our overseas push," Park says.
Coinciding with those fundamental changes was a period of relatively cheap credit by Korean standards. Financial authorities that during the 1990s maintained double-digit interest rates to encourage citizens to save money in banks have cut them to between 3.5% and 6% in recent years. The sharp drop in interest rates and the rapid aging of the country's population prompted the Korean middle class to look for better investment alternatives to prepare for their retirement.
Spillover from U.S. Subprime Fears
Little wonder Koreans have since evolved into committed stock investors. The improving profit performance of companies and the inflow of $69 billion into the share market in the past three years have catapulted the benchmark Kospi index on the Seoul bourse to an all-time high of 2005.02 on July 24. That's double the levels back in February, 2005.
The index fell back somewhat, to 1933.27 on July 31, because of the previous week's rout on Wall Street, which was touched off by fears of a credit crunch that could arise from trouble within the U.S. subprime mortgage market (see BusinessWeek.com, 7/27/07, "Asia Stocks: Wall Street Woes Hit Hard").
Mirae, of course, is a big beneficiary of the boom. It boasts 3 million investors who put part of their monthly income into the stock investment funds that it manages. That means an additional inflow of $760 million every week. Yet industry executives note that Park helped create a virtuous circle of growing investment funds feeding the market rally by consistently communicating with retail investors and by emphasizing his long-term track record. Mirae's average yield for three-year funds is 241%, against Kospi's rise of 99%, and the seven-year return for its Discovery Stock Fund is 744%, vs. the Kospi's 238%.
Seeking a Counterbalance to Mirae's Power
"No one in another company had the insight of a major shift in retail culture in Korea, and no other company had the [same] consistency in implementing a long-term strategy as Mirae," admits Kang Shin Woo, chief investment officer at Korea Investment Trust Management. Mirae, for example, refused to roll out a popular scheme where funds will be disbanded once a targeted return is achieved. Park's brokerage unit also declines to give advice to retail investors seeking to invest by themselves, rather than by joining a mutual fund.
Instead, Park in 2001 started building up a three-year track record to convince investors that longer-term investments would give them higher returns. Then he spent many millions every year to promote the firm's brand and, since 2004, to advertise the installment-type funds that have been crucial to the current rally.
One looming problem is Mirae's growing dominance in the industry and its sway in the market. Mirae's market share of 30.4% matches the combined share of the next five big asset managers. The government is not allowing a new license, saying there are already 43 other smaller industry players who take up the remaining shares. "Unless a new entrant comes up with innovation and grows to become a counterbalance, a greater dominance by Mirae could pose a threat of price distortions," says Lim at KDI.
Overseas Expansion in the Footsteps of Fidelity
Another uncertainly is that Mirae has yet to prove it can outperform others when the market turns bearish. "Park and Mirae have been bright, excellent, and well done so far," says the head of a European investment fund. "The potential weakness of Mirae is that it has never really experienced a bad time. If this giant starts selling shares, there might be a damaging repercussion in the whole industry."
Park's answer is to expand overseas to make Mirae Korea's answer to Fidelity Investments, the world's largest asset management firm with exposure around the globe. That, Park argues, will give Mirae more diversified investment vehicles to manage risk. Already, it has subsidiaries in Hong Kong and Singapore and has attracted nearly $9 billion to invest in China, India, and other emerging markets. Until Mirae launched its first overseas fund in 2005, most equity investment by Koreans was done through global asset managers such as Fidelity, Prudential Financial (PRU), Schroders (SHRRF), and HSBC (HBC).
"Our target is to become the most respected fund manager specializing in Asia in three to five years," says Park. Mirae is preparing to open offices in Vietnam, India, and London to expand its reach. Mirae, which now invests some 70% of its $34 billion under management in equities, will also diversify its portfolio by moving into real estate, private equity, and hedge fund activities. "My plan to is to sell various Asian products to investors in the U.S. and Europe in a few years," Park says.