Samsung Asset Management forecasts that Korea’s market for exchange-traded funds will more than double in size to $26 billion by the end of 2015, from around $12 billion today.
This week the firm is celebrating the 10th anniversary of launching its Kodex ETF series, which were the country's first ETF products. Samsung sees its own ETF business also doubling to over $13 billion in the same period, from $6.2 billion.
Bae Jae-Kyu, CIO and managing director of Samsung AM’s ETF business, says the firm aspires to become the third-biggest ETF manager in Asia-Pacific.
It ranks sixth at present, behind Nomura Asset Management (with $25 billion of ETF assets), State Street Global Advisors, Nikko Asset Management, Daiwa Asset Management and BlackRock.
Japan and Korea are the two fastest-growing domestic markets for ETFs, while Chinese managers are also demonstrating fresh activity. But for Korea’s ETF market to develop so quickly will require the outflow from mutual funds that began in 2008 to continue.
And for Samsung to retain its market leadership over a growing coterie of rivals, such as Mirae Asset, Kyobo Axa Investment Management and bank-backed fund houses, it must invent more new products and globalise its franchise, says Bae.
He has previously spoken to AsianInvestor about the potential for cross-listing ETFs on overseas exchanges, although he also concedes there are challenges.
Samsung AM plans to develop ETFs covering all types of asset classes. This year it introduced Kodexti equity and gold products, and is readying a China A-share product for next year. Other ideas on the books include ETFs for emerging-market equities, fixed income across the yield curve, new commodities, and ETF products designed specifically for pension plans.
This is not only an outline for growth, but also a defensive move to diversify the firm from its mainstay products, which are retail-oriented inverse and leveraged ETFs.
Although market index ETFs make up 56% of the market, leverage and inverse ETFs together account for a further 15%. Moreover, they are far more important in terms of volumes.
Fixed-income ETFs promoted by bank-related asset managers are another fast-growing segment and now account for 11% of the market. The remainder includes various equity or commodity strategies, sectors and themes.
Creating ETFs to cater to day traders has propelled Samsung’s business, but regulators are sounding concerned about speculative products using leverage or shorting.
The future may lie with developing the institutional market. Samsung estimates institutions are no more than 30% of local ETF assets, far below equivalents in the US or Europe. Corporate pension plans are a growing business segment, but the big push would have to come from the $340 billion National Pension Service (NPS).
To date NPS has avoided domestic ETFs; because of its clout, it can invest in local active managers for very low fees. One way for ETF managers to attract NPS money would be to slash their fees even further.
Fees for many ETFs are higher than international norms, with some ETFs charging as much as 79 basis points in management fees. But this is mainly true for the inverse and reverse ETFs, which would probably not appeal to institutional investors.
Standard bond ETF management fees are as low as 15bp. There is some room to cut fees, which might suit a large player such as Samsung, but would be deadly for some of the smaller players (there are now 15 local asset managers with ETF products).
And Korean ETFs are more expensive than counterparts in the US to compensate for less liquid markets and thinner volumes, so fees can only be reduced in line with local capital-market growth.
Another way is for the industry to lobby the government or for NPS trustees to perform a national service by investing in local ETF managers, although this would clash with NPS’s preference to become more independent and professionalised in its investments.
Could the happy middle ground be found in selling global ETFs to NPS?