Shinhan BNP Paribas Asset Management, the second-biggest asset manager of onshore mutual funds in South Korea, has begun marketing so-called ‘condensed’ funds in expectation that next year will see local retail and high-net-worth investors resume buying domestic equities.

Patrick Mange, co-deputy CEO at the joint-venture company in Seoul, says everyone in the industry expected 2010 to be a tough year, in anticipation of many retail investors redeeming out of domestic and international equity funds as markets recovered.

“But 2010 has been harder than we expected,” he acknowledges. Most firms in the industry have missed their targets because of the relentless outflow from equities among retail investors. Foreign investors have been heavy buyers this year, but haven’t been able to fully compensate.

According to industry statistics (from Kofia), so far this year Korean equity funds have lost over W9.0 trillion (-$7.9 billion) to net outflows. International funds lost another W6.5 trillion (-$5.7 billion). The biggest gainers have been money-market funds (W6 trillion, $5.3 billion) and domestic bond funds (W5.8 trillion, $5.1 billion). The total industry AUM is modestly down from January, as of end-October.

However, as firms such as Shinhan BNP Paribas plan their budgets for 2011, Mange is optimistic. The selling has been so massive that it should be nearly over. He reckons that as the Kospi returns to the 2,000 level, selling will switch to buying among retail investors. The index closed at 1,907.87 on October 28.

“I hope the index can test the 2,000 level by the end of the year, because after that, we should move into free space,” Mange says.

Investors in Korea, when facing losses in their funds, tend to sell as index levels return to the point of the initial purchase. The Kospi last rose above 2,000 in 2006-07, a high point for surging into both domestic equities and global emerging-market funds.

Mange says this behaviour limits investors to breaking even every few years, and firms are working to convince people to take a longer, more confident view of markets. “But it’s hard to convince them,” he says. “I can understand the frustration, given Koreans have been through three market crises since 1998.”

He also expects that foreign investment will continue, even as locals return to the market next year. South Korea continues to enjoy attractive fundamentals, including a small fiscal deficit, low levels of public debt, low inflation, reasonable if not spectacular economic growth, and low unemployment.

The Kospi benchmark index trades around eight to nine times the price/earnings ratio, so valuations are fair. Korea is ultimately a good China proxy, and as the US embarks on quantitative easing, liquidity will continue to be pushed to emerging-market growth stories.

Although Shinhan BNP Paribas has a range of domestic and international equity products at hand, its bond and credit funds have been its biggest sellers this year.

One new business opportunity is so-called ‘condensed’ funds. This is the banks’ response to brokers being able to package and sell high-octane investment products. Recently approved by the Financial Supervisory Commission, banks are now allowed to sell advisory wrap accounts in the form of highly concentrated stock portfolios.

Brokers’ wrap accounts have become the biggest traders in Korea, diving in and out of the most liquid large-cap stocks on the Kospi. The local media has dubbed the most traded stocks the ‘seven princes’ (although there’s not an exact consensus on which stocks count as a ‘prince’).

Now that banks are allowed to provide similar products, these princes can expect even greater trading volumes, regardless of their valuations – it’s the liquidity that counts.

Mange says these products are too new to have a clear idea of how successful they’ll be. “There’s been a lot of hype in the industry,” he says. But it might prove to be the lure to get retail and high-net-worth investors back into the equities game, particularly as long as there remains an overhang of people still waiting to redeem funds.