S. Korea's target-date funds get a little regulatory help

A September easing of regulatory limits on South Korean target-date fund equity allocations to 80% should accelerate the growth of that nascent $1.2 billion business segment, industry veterans say.

But the next regulatory shoe money managers are hoping will drop — making target-date funds the default option for corporate defined contribution plans in South Korea — could have a far greater impact, establishing South Korea as the first Asia-Pacific beachhead for a product that has dominated U.S. 401(k) inflows since winning default option status in the U.S. more than a decade ago.

"It's a story that we see developing across certain markets in Asia" — first in South Korea but hopefully in China and Taiwan as well, said Thomas Poullaouec, Hong Kong-based head of multiasset solutions, Asia-Pacific, with U.S. target-date fund heavyweight T. Rowe Price Group Inc.

T. Rowe Price teamed up with Seoul-based Korea Investment Management Co., one of seven joint TDF efforts forged by local money managers with veteran U.S. and European target-date fund managers since 2015.

Mirae Asset Management, one of South Korea's biggest money managers, is the only competitor among eight providers of target-date offerings to go it alone.

At $1.2 billion, target-date fund totals only account for a tiny fraction of South Korean retirement assets — in corporate defined benefit, corporate defined contribution and individual retirement savings vehicles — of roughly $170 billion at the end of 2017.

But with the bulk of those assets in guaranteed insurance products, offering tepid annual yields of less than 2%, money managers see reasons to be optimistic about potential growth.

South Korean investors historically are quite risk averse but the rapid takeup of target-date funds over the past two years points to the vehicle's potential to become "an important long-term savings tool" for the country's aging population, said Jay Lee, executive director with Seoul-based J.P. Morgan Investment Advisors Korea.

Local money managers began seeking out target-date fund providers in the U.S. and Europe with which to partner after regulators opened the door for TDFs three years ago by raising the maximum allocation a balanced fund could make to equities to 70% from 40%. The latest easing in September lifted that ceiling further to 80%.

The series that Korea Investment Management and T. Rowe launched roughly 18 months ago already has more than $200 million under management, which "in the great scheme of things, you can say is still relatively small, but for us, it's much faster than we anticipated," Mr. Poullaouec said.

Samsung Asset Management, which teamed up with Los Angeles-based Capital Group in October 2015 and launched South Korea's first suite of target-date products the following April, has garnered a dominant share of inflows so far, with more than 40% — or roughly $500 million — of the total market.

Mirae Asset Management, with two separate target-date series, is the next biggest competitor with roughly a quarter of the market, or $300 million.

Seoul-based managers KB Asset Management Co. and Kiwoom Asset Management Co., which teamed up, respectively, with U.S. index heavyweights Vanguard Group Inc., Malvern, Pa., and State Street Global Advisors, Boston, command a roughly 10% share of the market between them in passive, low-cost target-date funds.

Meanwhile, Shinhan BNP Paribas Asset Management Co., a Seoul-based joint venture between Shinhan Financial Group and BNP Paribas, launched its own TDF series in June 2017 and has a roughly 2% market share.

In an interview, Kim Hyun Jung, team head of Shinhan BNP Paribas' pension solutions center, said the target-date funds offered by his firm — the only one working with a European partner — have more exposure, relative to competitors, to Asia and emerging markets, while its U.S. exposures are unhedged.

By contrast, Mr. Poullaouec said T. Rowe's target-date series is focused on active strategies.

Hanwha Asset Management Co., J.P. Morgan Asset Management's partner, launched its target-date fund series — with a blend of passive and active exposures, and unhedged exposure to offshore equities — at the end of March. Hanwha's TDFs have a roughly 3% share of the market.

Shinhan BNP Paribas' Mr. Kim said it's a bit early in the life of South Korea's target-date fund market for providers to compete on the basis of performance track records, but such competition will become increasingly important going forward.

The next 12 to 18 months could prove critical, predicted J.P. Morgan's Mr. Lee, as competitors are increasingly judged on their target-date funds' unique selling points and performance.

Meanwhile, market veterans cite reasons to expect the current defined benefit plan-heavy mix of retirement assets to shift toward defined contribution in coming years, further supporting demand for target-date funds.

Kim Jung Hoon, division manager, retirement pension division, with Samsung Asset Management, said in a recent interview that while bigger South Korean companies are the ones offering their employees DB and DC plans now, more medium- and small-size firms will be required to do so in coming years. Those smaller-scale companies likely will favor defined contribution plans, Mr. Kim said.

The current split of retirement assets now is roughly $110 billion in defined benefit plans and a combined $60 billion in defined contribution plans and individual retirement accounts. Only 20% of the DC-IRA total, or $12 billion, is in investment funds, with a mere 8% of that sum is in target-date funds, Samsung's Mr. Kim said.

But defined contribution plans are likely to post substantially higher growth in coming years, said Samsung's Mr. Kim, predicting that by 2025, defined benefit and defined contribution plans could each have around $125 billion in retirement assets. A growing embrace of target-date funds, meanwhile, could lift their share of that $125 billion DC and individual retirement account total to 20%, or roughly $25 billion, he predicted.

Other market veterans predict strong but more modest growth. Shinhan BNP Paribas' Mr. Kim said his best estimate is that retirement assets of roughly $170 billion now could grow to just under $270 billion by 2025, while the portion of that total going into investment funds could expand to 10% from 6% to 7%.

That would boost allocations to investment funds to roughly $27 billion, and if growing enthusiasm for target-date funds allows them to capture 30% of that total, South Korea's TDF market could expand to $8 billion by 2025, Shinhan BNP Paribas' Mr. Kim said.

A decision by regulators to make target-date funds the default option for corporate defined contribution plans could be the key to making more aggressive estimates realizable.

The recent regulatory change on the ceiling for equity allocations could pave the way for target-date funds to become a default option in the future, a development that would be very positive both for TDF providers and the retirement prospects of South Korean savers, said T. Rowe's Mr. Poullaouec.

The proportion of flows going into default options in other DC systems is typically anywhere between 25% and 50%, Mr. Poullaouec noted. A spokesman for South Korea's Department of Labor, which will ultimately make decisions on default options for corporate defined contribution plans, couldn't immediately be reached for comment.

The ranks of firms offering target-date products in Seoul, meanwhile, could grow.

A spokeswoman for New York-based BlackRock Inc. said in an email, "BlackRock seeks to participate in Korea's target-date fund market by providing tailored TDF model portfolios to (Seoul-based) IBK Asset Management," which intends to launch a product by the end of 2018.