New MSCI office highlights Korea’s rising importance

The opening of MSCI’s new office in Seoul this week has underlined the rising importance of South Korea to the index provider and the wider investment industry, argues Henry Fernandez, MSCI chief executive.

Several of the firm’s rivals – such as Dow Jones Indexes, FTSE and S&P Indices – are similarly bullish about Korea’s prospects, highlighting the potential growth of the country’s big institutional investors.

Neither FTSE nor Dow Jones Indexes has a local presence in Seoul, but S&P Indices has had an office there since 2005 and has partnered with the Korea Exchange since 2008 to provide the S&P/KRX Exchanges Index.

FTSE does not have “an immediate plan” to open an office there, but services its Korean clients from its Asia hub office in Hong Kong, says Jessie Pak, Asia sales director.

At the same time as the office launch, MSCI announced the MSCI Kukje Index, a market capitalisation-weighted index designed to measure the equity market performance of developed and emerging markets excluding South Korea. The Kukje Index is the same as MSCI Acwi ex Korea and is hence investable. Other firms offer similar products, one being the FTSE All-World ex-South Korea Index.

MSCI’s plans to open in Seoul were sparked four years ago, but the financial crisis proved a distraction in 2009, as did the company’s acquisition of RiskMetrics in 2010, says Fernandez. MSCI has been servicing South Korean clients from other offices in the region since the late 1990s.

There are a number of reasons why MSCI has opened in Seoul, he says. Firstly, the country’s financial markets are developing very fast compared to those in the rest of the world. It already has a “huge” pension fund system of $300 billion-plus in AUM that is expanding faster than most.

Moreover, the National Pension Service (NPS) and other pension funds and entities such as Korea Investment Corporation (KIC) are seeking to redirect an increasing amount of their investment overseas, meaning the amount of tappable assets is growing fast.

Then there are the country’s asset managers, notes Fernandez. A number of the large firms have global ambitions with regard to exchange-traded funds. Indeed, Samsung Asset Management said in December it plans to launch an ETF based on the MSCI Korea index, and another firm is also working on such a product. Fernandez says he hopes to see the first ETF launched within the second quarter and another two or three months later.

“We’re hoping that over time we can bring foreign ETFs to investors in Korea rather than them having to go to Europe or the US to buy them,” he adds.

MSCI also plans to service broker-dealers based in Korea, as they migrate their transaction-based business models to wealth management-focused ones, whereby clients pay a “wrap-around” fee for asset-allocation advice rather than simply for executing stock trades. To implement such a shift, broker-dealers need better risk-management and risk-suitability tools, says Fernandez.

Moreover, since Korea recently passed reforms to allow the creation of hedge funds, MSCI hopes to provide risk-management systems to this industry, once it gets up and running. The company owns brands such as Barra, ISS and RiskMetrics.

Fernandez also cites various figures to highlight the importance of the South Korean market. Some $1 trillion in assets globally is managed referencing emerging-market indices, and Korea represents around 15% of that figure, or $150 billion. Around two-thirds are actively managed, he estimates, and one-third passively, largely in exchange-traded funds or institutional passive funds.

Looking at the “flip side”, says Fernandez, Korea’s market capitalisation is about $1 trillion, so MSCI represents about 15% of total market cap being managed actively or passively by foreign investors.

MSCI’s competitors in the index space may not be able to boast the same sort of figures when it comes to providing benchmarks, but they are making some inroads.

More than $1 billion in assets are benchmarked by Korean institutions against S&P Indices, says Robin Lo, senior director of S&P Indices for Asia-Pacific. He adds that Samsung AM and Mirae Asset, the two biggest domestic ETF providers, have $100 million in ETF assets tracking the S&P GSCI commodity indices. Moreover, local firm Shinhan Bank has structured products linked to S&P Korea Corporate Group Indices with close to $250 million in AUM.

Meanwhile, FTSE’s Pak says the index provider has been focusing on providing offerings for its clients’ overseas portfolios, including alternative assets classes such as real estate and infrastructure and alternatively weighted strategy indices. (Korean institutional investors, such as KIC and the NPS, have been significantly increasing their exposure to alternative assets.)

Pak also cites FTSE’s capabilities in terms of China indices, and says it plans to support international QFII quota owners such as NPS to make informed investment decisions in the China A-share market.

AUM figures are not available for Korean institutions using FTSE indices, adds Pak, but the firm’s client base includes major asset owners and fund managers in the country.

Meanwhile, Deborah Ciervo, senior director for international markets and products at Dow Jones Indexes, says: “There has been a growing interest from this market over the last few years for sustainable investments, as seen through our Dow Jones Sustainability Korea Index launched in 2009. And we keep looking at South Korea as an interesting market for index-based products in general.”