In the past few weeks, four global fund management companies have launched the first master-feeder structures in South Korea.
In all four cases, the local fund structure feeds investor assets to single Sicav funds domiciled in Europe. And, in all four cases, the Sicav underlying strategy is high-yield bonds.
On the one hand, this is a success. Master-feeder structures were allowed under the new Capital Markets Consolidation Act (CMCA) that Korea ushered in this past February. But foreign executives were nervous about whether regulators would in fact allow these to be introduced. They were concerned about overly cautious or protectionist regulators deciding that, at a time of financial volatility, giving local investors access to single Sicav funds might not be ideal.
Those fears proved unfounded. Fund executives give the Financial Supervisory Service kudos for being open to ideas on how to improve the implementation of the CMCA, and in general for supporting the funds industry.
Foreign players value the master-feeder structure because it allows them to take advantage of scale by channelling onshore money into existing strategies in Europe. It also matters because, at the end of this year, a withholding tax exemption on locally domiciled funds investing in international equities will go away. So these local funds will no longer grant any tax favours.
That's the unalloyed good news. The more ambivalent news is whether global fund managers have products that Korean investors actually want. AllianceBernstein, BlackRock, Franklin Templeton and Schroders together have raised about $30 million for their high-yield funds.
AllianceBernstein has the lion's share, with $18 million raised (its rivals say its product is not really a high-yield strategy because it includes emerging market debt), and Franklin Templeton clocks in with another roughly $10 million.
Because these are assets being added to proven funds in Europe, foreign players don't need to raise huge amounts from Korea to make a strategy work. So, in that sense, raising just a few million dollars is not so bad, particularly at a time when Koreans are redeeming out of most fund products.
"These fund launches were not blockbusters because high yield is not a blockbuster product," adds Andrew Ashton, who runs Franklin Templeton's business in Korea. Instead it is a very niche asset class, one that does not exist onshore.
Nonetheless, four houses raising $30 million at a time when they weren't really facing other IPOs or new fund launches bodes poorly for the industry as a whole. Since the spring, Korean retail investors have been net sellers of Korean stocks. As the Kospi rises, and as Asian emerging stock markets recover, the number of redemptions of late has begun to rise. Meanwhile, the balances of demand deposits at banks have swelled as people leave mutual funds.
Most buying activity in the first half of the year was to domestic equities, out of international exposures. Korea's retail investors first headed home, and now they're heading out of equities. And it's fees on equity funds that pay the bills for distributors and manufacturers.
High yield was undoubtedly meant to be an asset class that could not only differentiate the managers, but could also provide competitive returns. Not many Korean investors seem to be in the mood to participate.