Deutsche Bank has teamed up with a leading Korean fund administrator this week, forming the first major alliance to position itself for the largest mutual fund market in Asia ex-Japan.
The German bank and A Brain have signed a three-year partnership agreement to jointly market their fund administration and custodian services to Korea's asset management companies (AMCs). No profit or cost-sharing agreements have been reached between the companies. But Jay Kim, A Brain managing director, says Deutsche Bank has the option to take up to 30% stake in the company in the first year.
As Korea continues to pull its fund management practices in line with international standards, more alliances are expected to come. FinanceAsia.com has learned State Street Bank is in close talks with the fund administration arm of Korea Exchange Bank (KEB) for a strategic partnership. KK Tse, State Street managing director in Asia, says it would be "inappropriate to deny or confirm" the talks before anything is finalized. But he reveals the company is planning to enter the Korean fund administration market by the year's end.
JV a must
As foreign companies cannot operate in the Korean fund administration market without a local partner, State Street will have to form an alliance with one of three remaining fund administrators. One of them is KEB, set up just over a year ago and already the oldest. The other two are Riesen Korea, one year old and owned by Hanvit Bank, and AM Tec, in which Daehan Investment Trust Company has a 20% stake.
Korea last year promised to reform its financial structure in exchange for financial support from the IMF, opening up a collective investment market that is estimated to be worth $200 billion. Among the reform measures, mutual funds and unit trusts are required to outsource their performance evaluation and fund administrative functions to increase transparency.
The Korean collective investment market can be divided into three sectors: AMCs, ITCs (investment trust companies) and ITMCs (investment trust management companies). AMCs are only allowed to operate closed-end funds, and they are the customers fund administrators targeting at. ITMCs can manage but are not allowed to sell unit investment trusts. The unit trusts they manage mainly come from securities companies, who sell unit trusts to retail customers and outsource the investment management functions to ITMCs. ITCs, on the other hand, can sell as well as manage unit trusts.
AMCs are the first of the three required to outsource because the sector is the smallest and youngest, with W7 trillion ($6.3 million) under management and just more than one year's old. Because many AMCs have been given a grace period before outsourcing their fund administrative functions, so far only W2 trillion is available to external fund administrators, in which A Brain alone has a W1.2 trillion share.
While the fund administration industry is still small, regulatory changes in the pipeline are expected to create a W223 trillion market for custodians and administrators. The first change is expected to take place in September when AMCs will be allowed to offer open-end funds. A Brain's Kim says many of the existing closed-end funds may be converted into open-end funds. And he expects the open-end fund market could grow two- to threefold in three years' time from a base of W7 trillion.
But the biggest market for custodians and administrators is in the unit investment trust area, with the three ITCs: Korea Investment Trust Company, Hyundai Investment Trust Company and Daehan Investment Trust Company, controlling around W160 trillion and ITMCs sharing about W56 trillion.
Unlike the mutual fund industry, unit investment trust operators are not yet required to separate fund administration from fund investment. A Brain's Kim expects it may take years before they are made to do so. But new unit investment trust operators, he notes, will be required to outsource their fund administration functions.
At the partnership signing ceremony this week, Roger Harrold, chief operating officer of Deutsche Bank's global securities services in Asia, says: "By sharing our experience and through introducing international fund accounting and valuation standards into the Korean market, we can play a positive role in the development of the open-end mutual fund structures."
The international investment fund community believes separating fund administration functions from investment can enhance the transparency of funds and, in the Korean context, prevent illegal transactions made between funds under the same group.
Kook-Joo Kim, A Brain president, expects the outsourcing trend will expand to discretionary accounts, pension funds as well as the unit trust market. A Brain currently administers 25 funds for nine AMCs.