ANALYSIS-Korea funds shakeout looms as investors go DIY

Published: 01 Jul 2009 23:27:01 PST

* Individual investors make up 70 pct of daily stock turnover

* Domestic stock funds saw outflows in past 2 months

* A third of fund houses in S.Korea posted losses in FY2008

* DIY move to help local brokerages post record qtrly profit

SEOUL, July 2 - Frustrated by poor returns and high fees, South Korean retail investors are dumping equity funds and picking stocks on their own, raising the prospect of consolidation in the domestic asset management industry.

While the 'do-it-yourself' attitude of the investors is forcing money managers in the $300 billion fund market, including global groups such as BlackRock Inc <BLK.N> and AllianceBernstein <AB.N>, to reassess strategies, it is seen yielding a windfall for Korean securities firms, who handle the investors' orders.

It is also raising concerns of heightened market volatility due to the perceived short-term focus of the investors.

"The main reason I decided to invest in individual stocks was because I was disappointed with the performance of equity type funds," said 28-year-old government employee Choi, who declined to give his first name.

From students to office workers, individual investors in South Korea have emerged as aggressive players in the booming Seoul stock market this year.

They were net buyers of 3 trillion won on the main KOSPI market in the past two months, helping to drive Seoul shares <.KS11> to an 8-month high by early June. http://graphics.thomsonreuters.com/079/KR_STKBY0709.jpg

Individual investors currently account for 70 percent or more of daily turnover, which trebled to 10 trillion won ($8 billion) in May from the end of December.

By contrast, new stock fund sales are down and institutional investors have sold a net 8.7 trillion won over the same period.

"For last year alone, losses from (benchmark) indexes and active funds were identical," said Jake Kang, an executive director of UBS Hana Asset Management's marketing division.

"That led people to ask, why should I pay 2-3 percent in fees when I could manage them myself?"

OUTFLOWS

After pocketing huge gains from an upsurge in real estate prices in the past decade, some individual investors are now managing 10 billion won to 100 billion won on their own in South Korea's 800 trillion won stock market.

"Compared with 10 years ago, individual investors have become much smarter and the size of assets under their management has been growing sharply, close to the size of assets managed by a fund house," said Jo Jae-hoon, a senior analyst of Daewoo Securities.

For the funds industry, that trend is causing a big headache. Equity funds are the most lucrative part of the mutual funds business, fetching about 1 percent in fees each for sales and management in South Korea.

Funds invested in domestic stocks have seen 1 trillion won of net outflows in May alone, thrice the outflows of 350 billion won seen in April, as per the Korea Financial Industry Association. http://graphics.thomsonreuters.com/079/KR_MNY0709.jpg

A third of the 63 asset managers operating in South Korea posted losses in the year that ended in March 2009, data from the regulator Financial Supervisory Service show.

LOW ENTRY BARRIERS

A dramatic growth in mutual fund sales in 2005 and 2006 had brought top global fund groups such as BlackRock, AllianceBernstein and JPMorgan <JPM.N> into South Korea.

But many of the newcomers have lagged behind top local houses -- Mirae Asset and Samsung Investment Trust -- as they struggled to win sales channels and establish their brands.

Low entry barriers to the business have so far put off the sector's much-needed consolidation as new players, many of them small firms, have set up shop.

"The sector has little choice but to consolidate. To maintain operations, systems and good fund managers, they need enough assets to pay costs," said Kang of UBS Hana.

The fund industry's woes, though, are benefiting domestic securities firms, with record-breaking quarterly profits forecast for Daewoo Securities <006800.KS>, Kiwoom Securities <039490.KQ> and others. These firms are seeing a jump in accounts opened by individual investors and services provided to them like research.

The individual investors are buying mostly small- and medium caps, such as shares of brokerages and builders, in pursuit of short-term and high returns, some analysts say. That is giving hope to fund companies that investors will one-day recognise the value of long-term investing.

"Equity fund investment is still relatively new in South Korea," said Lee Dae-woo, retail marketing manager at Consus Asset Management. "It will take time for investors to realise that there are ups and downs on even index funds."