Korean asset growth beckons U.S. firms

A steep rise in assets, a move to diversify investment portfolios overseas and regulatory changes to benefit the money management industry could combine to make South Korea one of the hottest markets in Asia for investment managers.

“Investors in Korea now look for more efficient ways of (portfolio) diversification,” said Jaechil Kim, senior research fellow and head of the funds and pension department at Korea Capital Market Institute, Seoul. “They feel that traditional equity and bond-type (strategies) are not fully diversifiable to each other, so they're looking at other types” of investments, such as absolute return, commodity and real estate investment trust strategies, among others.

“Those pension assets will be major sources of money for asset managers (operating) in Korea,” Mr. Kim added.

Some of the nation's largest institutions already are planning to outsource more assets as they seek to diversify their portfolios overseas, said Yoohee Won, Seoul-based CEO at BNY Mellon Asset Management Korea Ltd.

Several sources estimate that Korea's investment management sector will increase at a faster rate than any country in Asia, except China, among the larger markets.

“The average annual growth rate of assets under management will be above 10% in the future” in South Korea, according to Mr. Kim.

Korea is still dominated by domestic managers, particularly those tied to larger financial services providers, said Jayne Bok, director of investment services for Korea at Towers Watson & Co., Seoul. Four of the top five managers are home grown, and one is a joint venture between BNP Paribas and Shinhan Financial Group, a Korean financial holding company. The top five are: Mirae Asset Global Investments Group; Samsung Asset Management Co.; Shinhan BNP Paribas Asset Management Co.; Korea Investment Trust Management; and KB Asset Management Co. Ltd., according to data from industry organization Korea Financial Investment Association, using publicly available information on assets under management. (Some segregated mandates might not be made public.)

However, global managers are winning mandates in overseas fixed income, equities and alternatives — areas that are expected to gain in asset inflows, said Patrick Mange, deputy CEO at Shinhan BNP Paribas in Seoul. For example, 23% of the company's 32 trillion won ($28.16 billion) in assets under management sourced from Korea are invested mostly in overseas equities. Alternatives also are grabbing institutional attention, with private equity and real estate dominating, although hedge funds are making some inroads.

South Korea “is one of the most interesting Asian markets with a reasonable size” in terms of investment assets, Mr. Mange said, “and the competition among managers is among the highest in the world. Our joint venture puts us in a good position to take advantage of this fast-growing and increasingly sophisticated market.”

Shinhan BNP ranks second behind Mirae for overseas equity managers in South Korea in terms of assets under management, according to the financial association. Other global managers in the top 10 for overseas equity include Schroder Investment Management in third place, Fidelity Investments in fourth, J.P. Morgan Asset Management in seventh and BlackRock Inc. in ninth.

BNY Mellon is also building its South Korea business, gaining the license in June 2010 to provide discretionary investment management services to domestic institutions, according to Mr. Won. The manager is also active in subadvisory work, for example, managing emerging markets strategies for Woori Asset Management, the eighth largest money manager in South Korea.

Another firm that has invested heavily in South Korea is Franklin Templeton.

“We view it as a very important market for us in terms of asset growth potential,” said David Smart, global head of sovereign funds and supranationals at Franklin Templeton, London. The firm first established a joint venture in South Korea in 1997 with Good Morning Securities and later bought all of its outstanding shares to form the first 100% foreign-owned investment company in South Korea. Strategies run by the manager include domestic and overseas equities and fixed income, as well as alternatives such as private equity, managed by subsidiary Darby Overseas Investments Ltd. Franklin Templeton's assets under management sourced from Korea increased by 50% to $7.9 billion in the three years ended Dec. 31.

Institutional opportunities in South Korea come from three types of clients: government-owned giants such as the $286 billion National Pension Fund and the $37 billion Korea Investment Corp.; corporate pension plans; and insurance companies.

“There's a lot of room for asset managers to add value,” Ms. Bok said, “but it's a tricky market to access and finding the right partner is key. But despite all that, it's a pretty attractive market both because of the growth aspect and the changes in asset allocations” among institutions.

The government is implementing regulations to encourage corporate pension savings as well as better risk-adjusted returns for retirement assets. Beginning this year, sponsors and employees will have more tax incentives to save through corporate pension plans under the Employee Retirement Benefit Security Act. As a result, occupational retirement assets have risen dramatically, to 29 trillion won at the end of 2010 vs. 2.7 trillion won three years ago, according to the Financial Services Commission, which is South Korea's financial regulator. By 2015, corporate pension assets are estimated to reach 80 trillion won.

About two-thirds of the corporate pension assets are invested in defined benefit plans, 20% in defined contribution plans and the remainder in individual retirement accounts. Defined benefit plans are now limited to a 70% exposure to risky assets, including a 30% maximum invested directly in listed equities, while defined contribution plans have a cap of 40% in risky assets including equity-like strategies, according to Towers Watson's 2011 Korea Pension Report. These investment restrictions may gradually be lifted, but most plans have far to go in reaching the limits. According to the FSC, 88% of the corporate pension assets are invested in bank deposits or other cash equivalents.

“It will take some time for habits and risk appetites to change. It's a multiyear effort,” said Kim Hong, managing director and head of Asia Pacific at Pacific Investment Management Co. LLC, Hong Kong.

Insurance assets are another source of expansion for managers, sources said. While no statistics are available, according to financial research firm Cerulli Associates, insurers' investible assets in Asia have more than doubled to about $1.3 trillion as of June. Korea is a key contributor to that growth, sources said.

“During the (financial crisis), insurance companies (in South Korea) took risk off the table, and they're now in the process of rerisking,” Mr. Hong said. “It's a search for yield — a search for alpha.”

Among institutional investors that have posted a substantial increase in assets is Korea Postal Insurance, a government-owned insurer with about 31.8 trillion won in assets under management as of Dec. 31. In the past five years, assets have increased 58%, according to data provided by the company. Total assets are estimated to grow about 20% annually, with six percentage points from investment income, five from premiums and the remainder from business growth.

“We're expanding our clientele, adding more insurance contracts every year and bringing in more cash,” Chief Investment Officer Chuljoong Jurng said in a telephone interview. “We're less concerned about cash flows, unlike other institutional investors. This allows us to be more patient in considering the long-term perspective.”

About 80% of the portfolio is invested in fixed income or cash. Another 6% is invested in loans, and 14% is mostly outsourced in strategies ranging from equities, structured credit and alternatives such as hedge funds, private equity and real estate. Mr. Jurng declined to name the managers.

The firm is in the final stages of appointing a specialist commodities hedge fund manager, which Mr. Jurng declined to name because contracts have not been finalized.

Also, a search is under way for four or five private equity managers for a series of mandates totaling up to $200 million in strategies including distressed debt or non-performing loans and emerging markets.

Another priority for this year is raising exposure to global and emerging markets equities, appointing two managers for each strategy. The managers, expected to be named later this year, will be running about $50 million each in assets.

Overall, exposure to equities and alternatives will increase by as much as 1.5% of the portfolio, while the domestic fixed-income allocation will shrink. As with other institutional investors, Korea Postal Insurance is looking to diversify its portfolio overseas for better risk-adjusted returns.

“Last year, most Korean (fixed-income) assets were priced at par or over par, and on the equity side, (price-earnings) ratios were at record highs” for South Korea's stock market, Mr. Jurng said. Domestic government bonds were at historical lows in terms of yield.

Mr. Jurng added: “We need more risk assets.”