Surprise Korea Rate Cut Adds Pressure on Funds to Invest Abroad

South Korea’s biggest fund manager predicts the nation’s investors will add to record holdings of foreign debt after a surprise interest-rate cut eroded local returns.

Overseas investments reached an unprecedented $63.3 billion in bonds and $143 billion in stocks last year, the Bank of Korea reported March 5. Insurance companies and asset managers led the $18.3 billion increase in debt holdings in 2014, the second biggest jump since the BOK started compiling the data in 1994, as local yields tumbled toward historic lows.

“The latest rate cut will deepen the concerns of institutional investors as their returns are already under pressure,” Lee Do Yoon, chief investment officer for fixed income at Samsung Asset Management Co., which oversees 182 trillion won ($160 billion), said by phone on March 13. “While we need to keep a certain amount of money in domestic bonds, we also need to seek more opportunities overseas,” including corporate bonds in the U.S. and emerging markets, he said.

The Bank of Korea’s decision on March 12 to join a global wave of monetary easing is prompting investors to look abroad to meet their targets. The 4.5 percent return on South Korean insurance companies’ assets in June 2014 was less than the average 4.9 percent they promised their clients, according to the latest data from the Financial Supervisory Service.

Yields Slide

The yield on the three-year sovereign bonds sank to an unprecedented 1.86 percent on Monday, after the central bank last week cut its benchmark rate to a record 1.75 percent. The 10-year yield reached 2.21 percent in February, the lowest in data compiled by Bloomberg since 2000.

“The low yields are one of the reasons for the decisions by insurers and asset managers,” Jung Sun Young, an economist with BOK’s capital flow analysis team, said by phone Monday. “The trend is likely to continue for the time being, though the amount of increase in overseas investment is hard to predict.”

Local currency notes handed investors a 2.5 percent return this year compared with 9.2 percent in 2014, Bloomberg indexes show. Indonesian debt has paid 5.2 percent in 2015, while holders of Russian bonds earned 7.3 percent.

The 5.2 percent gain in the Kospi index of shares this year in local-currency terms compares with increases of 24 percent each in Denmark and Germany, and almost 11 percent in Japan. In dollar terms, the Kospi has advanced 2.1 percent in 2015, compared with a 9 percent increase in Japan.

‘Look Outside’

“Insurance companies should be worrying more about lower yields,” Heo Doil, Seoul-based head of asset-management strategy at Shinhan Life Insurance Co., which has about 21.8 trillion won of assets, said by phone on March 13. “Overseas investments have to be maintained. We need to look outside.”

The bulk of Shinhan Life’s investments are in foreign-currency securities issued overseas by the South Korean government, financial institutions and companies, according to Heo. The insurer is looking to buy dollar bonds issued in Asia to bet on a stronger greenback, and may consider securities in Europe as well as other developed economies, he said.

The prospect of interest-rate increases amid a recovery in the world’s largest economy has boosted the dollar and the appeal of U.S. assets. While Federal Reserve tightening coupled with easing in Asia will diminish the appeal of local assets, South Korean bonds will remain attractive to investors seeking a broader mix of assets, according to PineBridge Investments.

PineBridge Investments

“In general, we are underweight on local-currency bonds due mainly to the concern about currency, but favor neutral to overweight in duration in some local bond markets, including Korea,” Arthur Lau, the Hong Kong-based head of fixed income at PineBridge, said by e-mail on March 11.

Global funds have bought $6.8 billion more of South Korean debt than they sold this year though March 13, following $35.4 billion of net purchases in 2014, data compiled by Bloomberg show. The won rose 0.1 percent to 1,130.21 a dollar as of 11:30 a.m. in Seoul on Tuesday and is 3.5 percent weaker versus the greenback this year.

“Overseas investments will increase going forward,” Moon Hong Cheol, a fixed-income analyst at Dongbu Securities Co. in Seoul, said by phone Monday. “South Korean institutional investors can consider U.S. bonds with high credit ratings, such as Treasuries and bank debt. Some bigger investors may also buy U.S. corporate bonds and emerging market notes.”

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