Korea offshore funds top $10 billion

Korean investors have put more than $10 billion into mutual funds domiciled offshore, investing in international asset classes, according to statistics from the Association Management Association of Korea (Amak).

That marks a nearly 50% rise over the course of this year. Offshore funds accounted for approximately $7 billion at the end of 2005, and $4 billion at the end of 2004.

This is in addition to another $10 billion that has gone into locally domiciled funds that invest in international assets and hedge back to won, according to Jeon Kil-soo, CEO at Schroder Investment ManagementÆs Korea business in Seoul. Korean investors have therefore put $20 billion into international securities.

This rapid increase will continue, predicts Kim Jae-keun, researcher at Zeroin, a local funds rating agency. ôInvestors in Korea have increased interest in global markets...for hedging the geopolitical risk by North Korea,ö he says. He also notes that with an aging society and the expansion of wealth, individuals are more focused on better returns for their retirement. ôBut the returns onshore are worse than in other global markets, such as Bric's [big emerging markets],ö he notes.

The November edition of AsianInvestor magazine features a detailed look at KoreansÆ international investing habits.

The Amak statistics show the demand is overwhelmingly for equity funds, particularly those focused on single countries such as Japan, China and India, or global emerging-market concepts such as Bric (Brazil, Russia, India, China).

Kim worries that this means investors havenÆt diversified their portfolios as much as they may think. He would like to see investors consider a broader array of sectors and regions. ôSome also need to hedge their currency risk,ö he says.

Fidelity Investments and Merrill Lynch Investment Managers (now acquired by BlackRock) are the big winners. Fidelity has seen its offshore assets from Korea explode from $987 million in early 2005 to $5.3 billion, a rise of more than 500%, accounting for more than half of the total offshore universe. MLIM has also seen its offshore component quadruple from $572 million in early 2005 to nearly $2 billion.

Other global houses, however, have not capitalised on this trend. According to Amak, Franklin TempletonÆs offshore AUM in Korea rose from $492 million in early 2005 to only $591 million now. And others have actually lost ground: HSBC, Prudential Financial and SchrodersÆ local businesses have seen offshore AUM declines over the past two years.

The other big gainers are the banks, which through their wealth-management divisions are churning out offshore equity funds û although this is not so much a change as a deepening trend. According to Amak, banks such as Kookmin and Woori now account for $7.7 billionÆs worth of offshore fund sales. Two years ago, banks accounted for about 65% of offshore sales.

Securities companies have failed to capitalise on this trend. First, banks sell almost entirely equity funds. Of the $2.3 billion of offshore fund sales by brokers, nearly a quarter are in bond products, which offer lower fees. Their participation in offshore fund sales has declined from 35% of the market to 23% in under two years.

David Mitchell, head of marketing for Fidelity in Korea, attributes the firmÆs success to the time and resources it has made to training distributors, which include the leading commercial banks. He expects the focus on hot markets will continue, but says the firm is now promoting a global real-estate fund. ôWeÆre educating our distributors about the opportunities in global property investments,ö he says.