"We had a good 2011, especially in the second half, thanks to the market downturn," says Cho Jaemin, CEO at the W26 trillion ($23 billion) KB Asset Management, one of the leading managers of Korean equity funds in AUM terms.

This captures the paradox that reigns over the Korean funds industry today: asset managers succeed when the Kospi 200 benchmark index falls, and suffer when stocks perform well.

It's the opposite of conventional wisdom regarding the business of funds management, particularly when equity funds pay most of the bills. For example, equities comprise about 30% of KB AM's assets under management, but account for around 50% of its revenues.

The reason goes back to the emerging-market bull run that prompted Korean investors to invest overseas, most for the first time. In 2006 and 2007, during the bull-run's peak, Korean retail investors poured into domestic and international equity funds.

Today those funds remain underwater, particularly those international ones. The typical investment horizon is no more than one year, so people are buying domestic equities on dips and selling whenever they reach par or take profits on Kospi upswings.

Last year saw equity markets worldwide plunge in the wake of the downgrade of US sovereign credit in August, and the Kospi was no exception, falling from 1,794 to 1,371 over the weeks that followed. That led to several months of record inflows for KB AM, thanks to equity fund performance that was above average, and to the powerful distribution machine of parent Kookmin Bank. While total industry equity flows were flat, KB AM gained W2 trillion ($1.8 billion).

But those flows have reversed year-to-date due to the strong performance of the Kospi, which closed at 1,754 on March 15, almost back to its August 1 level.

The result: an outflow of 5% of equity fund AUM, says Cho: "So long as the market is bullish, it's negative for the funds industry."

He notes that short-term behaviour is structural. The bulk of household assets are in one-year bank deposits, which now account for over $700 billion. Banks pay attractive yields, 50-70 basis points above one-year Treasury notes. Today that translates into a 4% yield that depositors continuously roll over.

This is subjecting depositors to long-term inflation risk, as well as vulnerability to a future cut in interest rates. But it's perceived as safer than equities. And for many profit-takers in equity funds, being short term has worked. Cho reckons many punters netted 10-15% last year. "But now what do they do with their money?" he wonders. "They can only wait for the market to decline again."

There is a minority of investors who have adopted longer-term products, called regular savings plans (RSPs). These are usually three-year instruments and have provided some stability to fund houses' equity flows. KB, for example, nets $100-150 million per month in RSPs.

In the meantime, the firm is looking to introduce some niche products to retain investor interest in equity funds. Competitors have succeeded with funds of equity-linked notes, and KB AM is under pressure from its banking affiliate to follow suit.

It has also seeded an onshore equity long/short product with $30 million. Hedge funds are brand new in Korea and KB AM is building a track record. The firm is also a market leader in domestic infrastructure and real-estate funds, and it is using this expertise to launch RSPs focused on renewable energy stocks.

But one area that KB AM has no intention to go is international equities, where there is no demand and a poor track record, and a huge overhang of underperforming funds that will eventually see mass redemptions should Bric, China and other indices recover.