Korea IM notes shift to index funds

Korea Investment Management is expanding its index team and updating its processes to cater to demand after winning mandates from institutional clients to run index funds in the past six months.

Insurance companies have been making changes to allocations in recent months, and that involves a shift into indexed investments, says JD Suh, head of global investments at Korea IM, the country’s second biggest fund house with $20 billion in assets under management.

Most of the nation's larger firms – the biggest are Samsung Life, Korea Life and Kyobo Life – and some of the smaller ones are making such moves. They are not so happy with returns from active equity funds, adds Suh, and are increasing index fund exposure, both offshore and domestically. But they still want alpha, and as such prefer enhanced index funds. 

Active equities haven’t outperformed their benchmarks in recent months, notes Suh, and institutional investors in Korea are trying to diversify into overseas property and private equity, as well as looking at more structured deals.

As a result, Suh is trying to make the index team more efficient by adding staff and changing some of the management processes and models. Korea IM is developing indexing and stock-selection models, updating risk management and tightening processes for managing index funds.

In August Suh hired three people for its exchange-traded funds (ETF) business – two sales and one investment executive – and is looking for one more on the index development side. He declined to provide names of the new appointments.

Meanwhile, Korea IM is trying to launch more global multi-asset funds that invest in multiple ETFs. The firm set up a three-strong team to launch one such fund about two to three years ago, and Suh argues that now is the right time for these products on account of their diversification benefits.

The fund launched in November and has posted an annualised return of about 11.7% on 3.98% volatility as of September 4, although inflows into the fund have been minimal so far, notes Suh. AUM stands at about $10 million, but the target is to hit more than $50 million. It invests into fixed income, equities, property and commodity ETFs.

Most money has come in via private banking channels, and it is likely to be some time before the firm can sell such products in the form of segregated accounts, since investors want to see at least two years’ track record, says Suh.

Meanwhile, flows into overseas equity products remain small, as investors only get tax redemptions on domestic equities, he notes “and that probably won’t change any time soon”.

Government candidates have talked about amending income tax regulations at the end of 2012. Suh would like to see that happen, but is doubtful it will.