공지사항

				        	Restructuring the Korean ITC market.

The long awaited and much debated new Asset Management Business Act (AMBA) is finally here. As countless articles have described, it was going to change the competitive landscape as banks’ IT products, BC’s and mutual funds will be governed under one law. Inclusion of investments in sectors such as real estate, precious metals and use of “over the counter” (OTC) derivatives, as well as insurance companies being added to the list of distributors, were all going to heat up the competition as all players battle for a larger piece of the Asset Management Pie. However, is the ultimate beneficiary, the client, really better off?

While some excitement is warranted and this is indeed an encouraging dimprovement, it should be seen as another step to improving the asset management industry, rather than an end result. Some observations of the current asset management environment may provide some clues, as well as offer suggestions for further development.


The Korean fund industry is developing at a rapid, albeit somewhat chaotic pace. Yet, the trend of total assets has been quite stagnant since the decline of H2 1999 and not in line with that of other markets.The recurring theme seems to be lack of trust in the industry, while really a lack of knowledge and understanding of investments and investing can be blamed as causes for the supposed low risk appetite.

The Korean fund (BC) market is heavily skewed towards Fixed Income products (short term-, long term bonds and MMF). While this may illustrate the Korean investor’s risk appetite, it also illustrates the level of understanding and sophistication.



Funds offer a unique and cost efficient opportunity for all investors to effectively outsource their investment mandate. At an average net cost of between 50 and 250 basispoints per annum (depending on fund-type), investors can choose to pool their investments and concentrate on allocating their assets according to their risk profile. At the same time, they can manage their manager who usually receives between 10 and 75 basispoints, and insist on a proper service and support from their distributor, who is compensated with the rest.

Part of that service should be the offer to match the client’s risk appetite with return expectation. Let there be no misconception: every investment entails a risk. That is why, depending on the acceptable risk, we may expect a higher return. Currently, fund managers (compensated only for managing money) do not control the distributor but are usually involved in marketing activities. The rules for marketing materials have been tightened, but there are still improvements to be made regarding proper education, client’s risk assessment and risk disclosures and warnings. A distributor who offers solutions rather than quick profits or promises returns should be the client’s choice.

While the fund industry’s AuM has been stagnant, the sum of investments, placements and Life Insurance products continued to grow. The increase in Life and Pension products clearly shows the demand for security and capital appreciation with a view towards the future. It is becoming clear that the demographics of our country with the lowest birth rate will cause incredible problems for the current work force and the next generation of workers. Relying on basically under-funded National Pension and severance systems may prove to be costly and dramatic. In addition to a sound pension system, people will have to take control and start investing with a purpose with a longer time horizon.Source: Bank of Korea, KBITM

At the moment, retail investors have roughly KRW 62 trn invested in indirect investments (funds). But roughly KRW 92 trn is invested directly in stocks and bonds, while about KRW 325 trn is ‘invested’ in deposit-type instruments. The household penetration of investment products was 5.59% (end Q1 ’03) down from 6.37% at the end of last year. This compares unfavourable to about 14% in Europe and about 50% in the US, where, one in every 3 individuals is a mutual fund shareholder.Of course it took it took the US roughly a lifetime to achieve those numbers and Europe is still developing. We cannot expect Korea to achieve this overnight, but we can benefit from their lessons and experiences.For instance, Europe and the US too have experienced double-digit interest rates. This was very comforting for children’s savings accounts but adults realised it was, at best, a compensation for their money’s depreciation. While at time cash can be the safest place to park ones money during uncertain times or to wait for better opportunities, the lesson is it will not provide sustainable long term capital appreciation.If one were to invest KRW 100,000 every month at an average of 7%, this would grow to over KRW 115 mln in 30 years. However, placing the same amount on a deposit yielding only a net 2% would grow to not even KRW 50 mln in the same period.In most developed nations, investments have increased because people at young age were educated with the benefits of compounding interest and the importance and value of investing for a purpose.

The breakdown of investments by asset class shows a significant difference with the global average. In particular the Korean equity market is under utilised while bonds and balanced products are favoured. The volatile Korean stock market is usually blamed. Yet, about three-quarters of the daily volume is traded by locals on-line while about one-third is owned by foreign investors. On the surface the Korean stock market is indeed volatile, but really no more than the US NASDAQ or the Taiwanese weighted. At a closer look, the large cap companies such as Samsung Electonics, Posco or SK Telecom have shown all performed in line with large cap companies in developed countries.The long term growth perspective of the global and Korean stock market offers significant rewards for investors who manage an investment portfolio over time and carefully allocate their investments.

Source: ICI Fact Book 2003, KBITM



Domicile	AuM (U$ bln)	# of Funds	$mln/fund
Brazil 	$143.2 	2,755	52.0 
Canada 	$249.0 	1,956	127.3 
France 	$845.1 	7,773	108.7 
Hong Kong 	$164.3 	942	174.4 
Japan 	$303.1 	2,718	111.5 
Korea	$149.5 	5,873	25.5
Luxembourg 	$803.9 	6,874	116.9 
Switzerland 	$826.0 	512	161.3 
Taiwan 	$62.2 	351	177.2 
UK 	$288.9 	1,787	161.7 
USA 	$6,391.6 	8,256	774.2 
Total	$11,220.2 	53,126	211.2 
Source: ICI Fact Book 2003, AuM in open-ended Funds
The number of funds available in Korea relative to the assets invested is amongst the lowest in the world. While the time-to-market of investment products (BC’s in particular) is possibly amongst the lowest in the world, the products on offer surely only confuse investors and distributors alike.
In fact, due to the short term ‘ism if the Korean investor, most of the local products are not viable and expensive to manage, monitor, control, audit etc. 
and of no value to the remaining client, distributor, asset manager or industry. A smaller, better defined and distinguishable range of funds would be in the interest of all parties.

Currently, prior to the new AMBA’s implementation in December, there are 31 ITMC’s managing about KRW 150 trn. A closer look shows that only half of them has over KRW 3 trn in assets and only 5 have more than KRW 10 trn under management. The AMBA increases the number of players by adding ITMC’s and AM’s under one ‘umbrella’. Total assets under management however do not rise 
significantly. Further consolidation can be expected, which should lead to better pricing and service.

Preceding the AMBA, a lot of the debate centred on issues such as mandatory outsourcing of fund administration and direct distribution to institutions, which looked more like preserving old habits than embracing global standards and practices. 
From the above illustrations, one can conclude that changes and improvement have been made, but that more fundamental changes are needed to improve the quality of service and performance. Investor education is needed to create proper expectations and to instil the values of purpose investing even at young ages. More transparency at fund manager and distributor, as well as a better 
compliance culture will increase investors’ confidence and trust resulting in increased assets under management.

The industry can afford to be less concerned about a getting a bigger piece of the pie; rather with these efforts the absolute size of the pie has the potential to increase consistently and dramatically.