Despite a boom in the mid-2000s, Korea’s funds market has not kept pace with the country’s economic growth.

But ETF assets have grown substantially over the past five years, with local players owning the vast majority of the products.

And Korea’s institutional market has grown exponentially despite a shift out of risk, with the corporate pension system presenting managers with one of the greatest domestic opportunities.

At the start of the last decade, product was concentrated on local equity and bond exposures. Distributors fuelled growth by selling regular savings plan (RSP) accounts, which helped investors to access funds more easily. The government and media encouraged RSPs for savings, and most households came to own one or multiple accounts. When the Korean stock market surged, investors benefited. The boom lasted from 2004 to 2007, during which AUM among Korean equity funds increased ten-fold to $80 billion.

Initial interest in overseas exposures was muted. Foreign houses introduced Sicav (European-domiciled) funds starting in 2002. Distributor support also enabled these products to experience growth, with AUM rising from $1 billion in 2002 to $13.7 billion in 2006. The most popular funds came to be those offering double-digit returns: in high-yield debt, emerging market debt, and China or Bric equities.

This trend accelerated in 2007 when the government introduced a tax incentive for overseas investments via locally domiciled funds. The government also encouraged people to take dollars out of Korea, to offset what was then a strong trade surplus that was appreciating the currency, to the detriment of exporters. With the tax incentive in place, local and foreign fund houses launched a series of international funds. Assets in EM equity funds soared to $60 billion in two years.

The AUM of China and Bric equity funds increased on the back of strong short-term performance. Together these factors drove a herd of investors in risk assets just as the sub-prime crisis in the US triggered the global financial crisis. This led to large losses. Total AUM of Korea equity and international equity funds fell from $80 billion and $66 billion, respectively, at the end of 2007 to $53 billion and $13 billion by the end of 2014. Conversely, assets in local bond and money-market funds have shot up from $93 billion in 2007 to $134 billion today.

This reflects a shift out of risk, but correlates to underperformance of Korea’s stock market over the past five years.

Local interest rates have fallen to an historically low 2%. Investors are therefore looking for middle-range risk and middle-range returns. As a result, income-themed and high-dividend products have sold, as have international multi-asset funds more recently. Another growth area has been exchange-traded funds. Korea’s ETF market was born in 2002 and has grown throughout the 2010s at an annualised rate of more than 20%.

ETF assets across 172 products rose from $5 billion in 2010 to $18 billion at end-2014. This is a Korean story: local players own a 90% share and offer a range of asset classes, such as global securities and commodities. More recently, equity-linked securities and debt-linked securities have gained in popularity; ELS balances rose above $50 billion in 2014.

Korea’s institutional market has grown exponentially, from $60 billion in 2004 to $480 billion in 2014, representing a compound annual growth rate of 23%. Pension funds, sovereign wealth funds and insurers have outsourced via separate accounts and discretionary businesses.

Institutional opportunities will continue. The National Pension Service saw assets reach $460 billion in December 2014, up more than 60% from 2009. NPS assets are expected to peak at $2.5 trillion by 2043, before eventually declining.

Another growth area comes from investment-linked insurance products. Foreign life insurers introduced variable annuities (VA) products with returns linked to underlying exposures. With the support of tax incentives and demand among an ageing population, VA assets grew from $50 billion in 2010 to $80 billion in 2014, a CAGR of 13%.

One of the greatest opportunities for managers in future is with Korea’s corporate pension system, which was introduced in 2005. Driven by principal-guaranteed products (such as bank deposits and insurance products), corporate pensions have grown to $97 billion. About 70% of the market is defined benefit, with defined contribution (22%) and individual plans (8%).

Conservative preferences has meant little uptake for funds, which account for 6% of corporate pension assets. The government has implemented measures to support diversification. It also raised the cap on DC risk assets from 40% to 70%. This may prompt members to consider equity funds, and encourage fund firms to develop more such products.

YB Jeon is CEO of Franklin Templeton Investment Trust Management Korea