Goldman Sachs Asset Management has closed its onshore business in Korea after five years of losing money. The decision will also put an end to a sub-advisory relationship with Tong Yang Asset Management, as that was meant to give GSAM a window toward selling local products to local investors.

Market sources say the deal shows the danger of being too reliant on institutional business. Fees in Korea are very low, given the number of domestic fund houses, all of them backed by larger financial institutions, which are willing to do business at rock-bottom rates.

For example, fees for domestic fixed income mandates from local institutional investors are typically 3-5 basis points, the sort of pricing that would be associated with money markets in countries such as the US.

With $4 billion of assets under management in Korea, GSAM’s operation lacked the scale to make such low-margin business succeed.

When GSAM entered the market by acquiring Macquarie-IMM Investment Management in 2007, it inherited a $11.3 billion business, focused mainly on fixed income. The ambition at the time had been to reinvent the business around global Reit and infrastructure funds.

That didn’t last, although GSAM did also provide domestic equity funds, including a flagship fund managed by Kevin Ohn whose performance was top in 2011, earning it an award by AsianInvestor earlier this year.

However, such performance was partly due to the fund’s small size: what made it nimble in the markets also made it unattractive to big domestic institutions looking to write chunky tickets.

Without the capacity to attract the likes of the $340 billion National Pension Service, GSAM’s equity offering could not generate profits, and efforts to tap retail or other markets – including via Tong Yang AM – could not make up the difference.

Institutional investors in Korea will typically pay around 20-30 basis points for an equity mutual fund, versus the 60-70bps that can be charged to retail customers.

Other foreign fund houses are also under business pressure in Korea, but GSAM’s reliance on institutional and fixed-income business was “extreme”, according to one market source.

He adds that GSAM reputedly paid high salaries relative to its market peers. The combination of those costs with ultra-low fee revenue and insufficient scale have forced the firm to pull out.

GSAM will wind up its local business over the next six months. The fate of its staff is unclear, although a spokesman says the firm hopes to place as many people as it can with other parts of the Goldman Sachs group, either in Seoul or elsewhere.

The parts of the GSAM Korea business that ran money for the firm’s global mandates will be transferred to Singapore, along with at least some of the Seoul-based investment team members.