Korean asset management industry: challenges and opportunities April 14, 2011 Seoul International...
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Transcript of Korean asset management industry: challenges and opportunities April 14, 2011 Seoul International...
Korean asset management industry: challenges and opportunities
April 14, 2011
Seoul International
Financial Forum
1
Two observations (unrelated?)
Korean consumers love big cars
Government of Korea is committed
to Green Growth
2
What about our asset management industry? Highly contrasted situation!
Institutional business is robust and growing
fast
But
Retail business is suffering from continuous
redemptions for almost 3 years! How to regain
retail investor’s confidence is our biggest
challenge!
Environment: Banks and Securities are in a big battle
for market share in the High-Net-Worth segment
3
Korea is world #1 for number of funds (but many of them are small)
4
Small Fund issue – The case for Retail investors
This is a major issue for our industry’s efficiency and profitabilityand most importantly,
This is a very unfavorable situation for Korean investors
A small fund is like a small car with an environment-unfriendly engine.
How to solve the problem? 2 very opposite options:
- To get out of the small car (fund liquidation),- To exchange for a better car, bigger and with better fuel efficiency (fund
merger).
The second option (fund merger) provides a real choice for the investor:- Get out (investor can redeem any time)- Keep driving in a better car
Keep driving with a better car is win/win: - The AM industry does not lose the AUM.- The client is better treated.
We need improvement (more flexibility) in fund merger policy
5
Small funds issue – The case for Institutional investors
Korea has a high number of small single-investor institutional funds.
The remedy is “IFRS”!
IFRS introduction will have big impact on outsourcing:
- More demand for large mandates with tailor-made guidelines
- Less demand for single investor (small) private funds
- New demand for investments into existing collective public funds (*) for specific
(and well recognized) expertise : Index, High Yield, Overseas, Theme (Green,
etc.), etc.(*) Funds with strong track-record and big size
Big challenge and opportunity for the asset management industry!
It will transform the way we conduct “institutional sales”.
Focus will be on providing distinctive investment solutions.
GIPS (Global Investment Performance Standards) will finally become a key weapon for
business!6
What about Fixed-income and MMF space?
MMF:
The dual NAV system with daily disparity ratio is creating arbitrage
opportunities for investors and systemic risk for the AM industry, especially
in a rising interest rate environment.
A new benchmarking with practices in US and Europe is welcomed to resolve
this issue.
More generally, Fixed-income market is a challenge for the asset management
industry:
Big institutions purchase most of new bond issues and maintain a “buy & hold”
strategy.
Liquidity/diversity of counterparties for Repo, SLB, etc. is still low.
It means “domestic” hedge funds would only have the equity space to deploy
their skills…7
Retail market paradox
- Low demand for middle risk/middle return products
Clients do their own “barbell” strategy with MMF and high risk equity strategy
“ 모 아니면 도” (“All or nothing!”)
- Fast changing trends, fast changing taxation, contributing to “herd”
phenomenon
“Boom and bust” risk is always high, and confidence can be lost
At the same time
- Growing culture for long-term investments thanks to Regular Saving Plans
- This is reinforced by the growing trend for corporate/retirement and
private pension funds ( 퇴직연금 , 개인연금 ), VA/VUL insurance products
Another paradox is these long-term pension savings are mostly kept in cash
and balanced funds.....
Training on long-term investment and product suitability is key
8
Regular Saving Plan : now mainstream for fund investments in Korea
9
10
Retirement pension structure – as at December end, 2010
Source : FSS
- DB : 20.9tn KRW (72%), DC : 5.2tn KRW (17.7%) , IRA Type : 3.0tn KRW (10.4%)
- DC breakdown : Saving account 74.4%, Fund is only 25.6% !
- Retirement pension (29.1 trillion won) only 22% of total retirement market (including Retirement insurance, etc.)
And what about “export” business?
“Export is in our blood”
- Korean equity: leading local AMCs and foreign affiliated AMCs
(JVs, 100%) will play a growing role in the management of off-
shore domiciled funds distributed globally.
Off-shore vehicles (Luxembourg, etc.) are key for global
distribution. Asian passport is still far away (no single currency,
no harmonized regulations)
Demand for dedicated portfolios from large global institutions
could increase
- Other expertise?
11
And what happened to the “import” business?
Retail
Off-shore funds’ distribution was “killed” by the tax benefit on on-shore funds
in 2007
On-shore fund growth was stopped by the global financial crisis, and is now
devastated by continuous redemptions (recovery of the market, end of tax
benefit)
But
Concept of diversification is not “dead”
- On-shore funds must survive and grow again (let’s not lose all the
technology transfer, let’s not lose all the learning curve effort)
- Off-shore funds bring new solutions
1. Direct
2. Fund of funds
3. Absolute return offering (including hedge funds)
“Import” is good for the development of the local asset management industry
and is good for consumers (investors)12
First group of signatories in US and Europe signed in April and May
2006. They included top asset management companies AND large
institutional investors (“asset owners”).
First group of signatories in Korea signed in June 2007. They included
only asset
management companies (6, including NH-CA) and ESG research service
providers
Significant step is NPS signing PRI in summer 2009
It leads the way for other institutional investors to embrace SRI approach.
UN PRI - Principles for Responsible Investment : what about Korea?
13
14
To deliver performance AND meaning to investors
Awareness on sustainability issues (corporate governance, climate
change) is definitively increasing:
- growing SRI AUM from institutions
- opportunity for Green funds to be accepted as long-term
diversification
Integration by investors (asset management companies and asset
owners) of ESG criteria in the investment process will gradually become
main-stream.
Retail investors will also more and more request performance AND
meaning to their investments.
As PRI signatories, we must promote collaboration and engagement to
ensure that sustainability and investment go together.
Korea can provide a strong illustration of this new
momentum