Top Korea Stocks Manager Sees the Best Returns Coming From China

  • Meritz ranked first among 45 asset managers for performance
  • Firm is making final preparations for a China fund, CEO says

The man who helped make Meritz Asset Management Co. the best equities fund manager in South Korea over the last two years says Chinese stocks are likely to offer the better returns going forward.

"Korean investors will increasingly need to put their money in other countries’ stocks that offer high growth potential, like South Korea had in the past," said John Lee, Chief Executive Officer of Meritz Asset Management Co. in Seoul, which looks after 8.15 trillion won ($7.3 billion) of assets. "We’re planning to start investing in Chinese stocks and the approach will be buy and hold, as we’ve done at home."

Lee took the helm of Meritz in January 2014 and the firm’s flagship Korea 1 Equity fund ranks in the top 2 percent among peers for both this year and last, with returns of 24 percent and 16 percent, respectively. The gains boosted its ranking at local fund-rating company KG Zeroin Co. to first among 45 Korean asset managers, from second-lowest in 2013, when Meritz’s premier domestic equities fund of that time lost money.

South Korea’s Kospi share index sank to a two-year low in August and bond yields are near record lows, spurring demand for overseas investments as sliding exports take their toll on the economy. Capital outflows are expected to make the won Asia’s worst-performing currency this quarter, according to Australia & New Zealand Banking Group Ltd., which ranked first for the accuracy of its regional exchange-rate forecasts over the last 12 months. 

Korean Markets Overview

Meritz’s Lee is far from alone in looking beyond South Korea’s borders to boost returns. The National Pension Service, the country’s biggest public pension fund, said in June it will increase overseas investments to more than 30 percent of total assets by 2020 from about 22 percent last year. The fund is expected to send as much as $30 billion abroad annually as it strives to meet this target, Barclays Plc estimated this month. Money mangers in South Korea bought $159.5 billion of foreign equities and bonds in the first half, 25 percent more than a year earlier, central bank data show.

China Fund

Meritz’s preparations for a new fund investing in Chinese equities listed in the mainland and Hong Kong are at an advanced stage, Lee said last week in an interview. The firm is close to securing a Renminbi Qualified Foreign Institutional Investor quota that would enable yuan raised offshore to be invested in China’s domestic capital markets.

“We’re about to sign a local partner who shares our buy-and-hold strategy," Lee said. "We have no preference for specific sector and will select companies based on a bottom-up approach."

The Shanghai Composite Index of shares has returned 8.7 percent this year in won terms, beating a 6.1 percent gain in the Kospi, according to data compiled by Bloomberg. The Hang Seng China Enterprises Index of Chinese shares listed in Hong Kong lost 5.3 percent.

Since the arrival of Lee, Meritz’s equities funds were restructured into the Korea 1 Equity Fund in a bid to focus the company’s resources and improve returns. Its biggest holdings as of June 30 were food maker CJ Corp. and SK Holdings Co., which have climbed 74 percent and 26 percent, respectively, so far this year. Shares of Samsung Electronics Co. and Hyundai Motor Co., the two stocks with the biggest weightings in the Kospi, both fell by about 5 percent.

“We don’t include large caps such as Samsung Electronics just because they are big names," he said. "What matters is which company will prosper over a five-to-10 year horizon. There are bigger opportunities in small caps.”

The Kospi Large Cap Index, made up of the largest 100 stocks on the Korea Stock Exchange, rose 2.3 percent this year, while the Kospi SmallCap Index rallied 30 percent. Meritz started a fund focusing on smaller companies in June and plans to launch a global healthcare fund aimed at individual investors in January 2016, said Lee, who formerly led a Korean equities team at Lazard Asset Management.

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