Growing Korean institutional investor appetite for overseas investments will continue to lure foreign asset managers into the challenging but potentially lucrative local market, according to industry experts.
However, to become successful, they will increasingly prefer tie-ups with local partners to navigate the Korean market and need to offer a more diverse suite of products to local institutional investors, who are typically active and aggressively investing in overseas equities, fixed income as well as alternatives, experts told AsianInvestor.
The recently announced joint venture between Franklin Templeton Investment Trust Management and Samsung Active Asset Management is one example of what is likely to become a more visible trend in coming years for entities determined to make a success of Korea operations, according to Elizabeth Oh, head of investments advisory for Korea at Mercer.
There is little doubt that Korea’s funds market is tough to operate in, as evidenced by the exit of several big names from the local market in recent years, including Goldman Sachs Asset Management and JP Morgan Asset Management in 2012 and 2017, respectively. UBS also sold its 51% stake in UBS Hana Asset Management to Hanwha Investment & Securities in September 2017.
An inability to scale up assets is partly to blame: JP Morgan Asset Management's assets under management (AUM) in Korea, for instance, fell from 3.2 trillion won ($2.9 billion) in September 2012 to 1.1 trillion won in September 2017, according to data from the Korea Financial Investment Association (KFIA).
Neverthless, the opportunities within the $213 billion Korean mutual funds market remain intact for asset managers with the right strategy, said market experts.
TOUGH NUT TO CRACK
While Korea’s retail funds market has been traditionally tough to crack, the institutional space is considered a much brighter spot for foreign managers, given it is home to a range of institutions that continue to actively outsource and diversify their portfolios, said Chin Chin Quah, Singapore-based associate director at Cerulli Associates, a global consultancy that tracks mutual fund flows.
Korean institutional investors have signalled increasing interest in diversifying to overseas and alternatives investments. The Police Mutual Aid Association said last year it would increase its exposure to foreign alternatives and equities. Similarly, the Public Officials Benefit Association (Poba) issued its first segregated mandates in private debt and the National Pension Service (NPS) increased its private markets investment team in 2017 as well.
Yet winning such mandates requires a deep understanding of the local language and culture, investment behaviour as well as the internal structures of these investors, Mercer's Oh told AsianInvestor.
Increasingly, foreign asset managers are coming to the conclusion that partnering with a local firm to cater to institutional clients might be the best way to go. Local managers are also keen to make use of global expertise and products to draw in investors.
The Franklin Templeton-Samsung AAM combined entity, announced on March 14 and expected to be established in the second half of 2018, will offer the Korean fund house access to the Franklin Templeton's resources, such as its research capabilities, global active management services, as well as guidance services for institutional investors.
In return, Franklin Templeton, which has standalone assets under management of $5.1 billion in Korea as of March 2018 according to KFIA data, gains a broader distribution network with increased local access through Samsung AAM, which has a strong position in the market, added Oh.
Samsung AAM is wholly owned by Samsung Asset Management, the largest asset manager in Korea by AUM in 2016, with around 13% of total market share according to data from Cerulli Associates.
For Samsung Active Asset Management, which has $4.7 billion in assets under management, teaming up with a foreign asset manager crucially opens up overseas investment platforms -- an increasingly popular strategy for Korea’s institutional investors.
“Samsung wants to expand its overseas footprint and overseas product lines; this merger can enable them to offer a broader range of products and services,” she said. Nevertheless, she did not expect the joint venture to affect the fee structure for clients.
MORE PRODUCT DIVERSITY
Of course, a joint venture is not the only option to achieve success in this market. “Local fund houses can also tie-up with global asset managers for specific products or asset classes or funds. A diversity in collaboration is very much possible,” noted Oh.
A Franklin Templeton spokesperson told AsianInvestor that over 50 mutual funds and 40 separate accounts will be transferred to the joint venture company.
While the spokesman said the new venture had no overarching focus on institutional investors, Mercer’s Oh expects the partnership to bring about a broader range of products that will appeal to Korean institutions as well as high net worth investors.
“The new entity is likely to build-out new products for overseas investing through Korean vehicles – they could be public funds or for private investments,” she added.
On its own, Franklin Templeton has operated in Korea for several years but has struggled to grow, Oh noted. Targeting retail clients has also not helped.
Interest for foreign market exposure remains muted among retail investors, after most of them experienced losses in the aftermath of the 2008 global financial crisis, noted Cerulli Associates’ Quah.
The strong performance of the local equity market in 2017 is also not encouraging demand for overseas products, she added. The MSCI Korea index posted returns of 47.8% last year.
“Given this backdrop, foreign managers have understandably found it difficult to crack Korea’s retail market and gain considerable scale,” Quah told AsianInvestor.
Things could change if foreign managers start to train their sights on institutional investors.