Mobius Enjoys Dental Surgery in Bid to Uncover Korea Small Caps

  • Smaller companies are beating large caps by most in 10 years
  • Bigger firms weighed down by governance issues, slowing growth

The highlight of Mark Mobius’s visit to Seoul last month was some dental surgery.

The 78-year-old fund manager watched five minutes of a tooth-implant surgery without blood letting at a laboratory last month as part of a search for innovative companies in South Korea. His Templeton Asia Smaller Companies Fund, whose five-year return beat 95 percent of peers, has made the country its largest allocation in the region at 29.6 percent, data compiled by Bloomberg show.

"There are new, innovative companies in Korean markets,” said Mobius, executive chairman of Templeton Emerging Markets Group at Franklin Resources Inc., which declined to name the company involved in the dental technology. “They analyze the structure of your bone, map where you should drill down through gum into bone and screw a tooth right in. There’s no blood." 

As President Park Geun-Hye introduced measures to spur innovation and reduce the power of conglomerates, the Kospi Small Cap Index returned 27 percent this year, beating a decline of 3.3 percent in the Kospi Large Cap Index, the biggest outperformance since 2005. Bigger companies such as Samsung Electronics Co. are struggling as they become targets of foreign selling in the run up to higher U.S. interest rates, corporate governance issues erode investor confidence and exports slump.

Consumer and health-care companies topped the list of holdings in South Korea at Templeton’s Asia small-cap fund, followed by technology stocks as of June 30, according to data compiled by Bloomberg. In the rest of Asia, industrial and financial firms together with consumer shares were among his favorites.

Cosmetics and tourism industries were the main beneficiaries of a 42 percent surge in Chinese visitors to South Korea to 6.1 million last year, sending Amorepacific Corp., and Hana Tour Service Inc. to all-time highs in July. By contrast, Samsung Electronics plunged to a 2012 low last month.

The foreign selling accelerated as billionaire activist Paul Elliott failed in a bid to defend minority shareholders from a restructuring he argued benefited Samsung Group’s founding members. He called the merger between Samsung C&T Corp. and Cheil Industries Co. “unfair and unlawful” on Aug. 6. Lotte Shopping Co. also suffered from public fights between the group’s two brothers over management control.

“What we’ve done is a lot of small caps,” said Mobius who allocates less funds to Korean equities in his ordinary funds than recommended by the benchmark index. “The chaebols, you know, they have problems and small-cap companies are doing very very well.’

Nurturing Startups

Templeton’s small-cap fund held shares in Bukwang Pharmaceutical Co., Medy-Tox Inc., GS Home Shopping Inc. and Neopharm Co. as of end-June, the data shows. Biopharmaceutical company Medy-Tox saw revenues in the second quarter jumping 26 percent from a year ago, while Neopharm, a maker of skin care goods for atopic dermatitis, reported first-half net profit larger than the whole of 2014.

Korea’s government, faced with the world’s most rapidly aging society -- average life expectancy is forecast to be 95.5 years by the end of the century -- is trying to develop a ‘creative economy’ via nurturing startups in order to overcome sluggish economic growth and a shortage of jobs for young people and women.

The Kospi small-cap gauge rose 0.6 percent at the close, while the index of the biggest companies was little changed.

Won Weakness

There are signs of a rebound in large caps. Hyundai Motor Co., the nation’s biggest automaker, has rebounded 27 percent from a five-year low touched on July 17, and its affiliate Kia Motors Corp. also made a similar advance in the period. The won weakened 6.4 percent against the dollar since the end of June, halting a fourth-quarter advance, and fell 8.2 percent versus the yen, prices compiled by Bloomberg show.

“The favorable change in the exchange rates will revive exporters and tip the balance in favor of larger caps after an excessive outperformance by small companies,” according to Park Jeong Woo, a Seoul-based analyst at Korea Investment & Securities Co.

The won’s slide shows little sign of lending support to shipments. Korea’s overseas sales have fallen every month this year, with the latest 14.9 percent drop in August the biggest since 2009. China’s manufacturing gauge fell to a six-year low in September, according to figures from the Caixin Media and Markit Economics on Wednesday, boding ill for South Korea’s industrial output which unexpectedly shrank 3.3 percent in July.

“The economy is entering the low-growth phase and there are no earnings drivers for traditional heavyweights,” said Heo Pil Seok, Seoul-based chief executive officer of Midas International Asset Management Ltd. “As more and more investors pour in, smaller companies become mid-sized giants and compete for the top spots.”

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