For Korea's mutual funds industry, which is as damaged by losses in equity valuations as anywhere else, to say 'no' to new inflows seems strange. But the industry's self-regulatory organisation, a division in the Korea Financial Investment Association (Kofia), has this week agreed to limit new inflows into money-market funds, and to wean institutional clients off money markets within the next 70 days.
The goal is to reduce institutional exposure to money-market funds by 15%, to around W50 trillion ($33 billion), from about W60 trillion today. Institutional inflows have surged this year, bringing the total invested in money-market funds to W130 trillion ($86 billion), along with retail investments.
Each fund house is required to control its institutional clients' money-market exposures, as well as the weighted average maturity of the funds. Any money-market vehicles with a weighted-average maturity above 80 days has two months to bring this down to 70 days; those with WAM of 70-80 have a month to get it below 70. According to Kofia, 22 companies have money-market funds with WAM of 80 days or above, totalling W8.4 trillion, while another 33 companies have funds with WAM between 70 and 80 days, valued at W25.4 trillion.
"There is something like a bubble in money-market funds," says one fund management CEO in Seoul. "There is a fear if interest rates change, or if regulatory guidelines for institutional investors require them to suddenly reduce their exposure, or if returns in money-market funds lose their competitiveness, then there could be a sudden outflow."
This could create huge losses for the funds industry. The situation could worsen if these funds suffer from a liquidity mis-match due to weighted-average maturities that are too long. If institutions decide to quit money markets, they would do so en masse, forcing providers to sell their most liquid assets together. Those stuck with longer-term instruments would be forced to sell off other, short-dated paper even more, creating a dangerous imbalance. And if such an event stemmed from a rise in interest rates, mass sell-offs would force money-market funds to realise losses.
Fund industry executives stress they are not predicting a run on money-market funds. But this sort of thing has happened before in Korea, and in the current environment, the industry does not want to risk yet another headache.
There are 15 fund houses with 95% of market share in money markets. These include Samsung ITMC, KB ITMC, KDB, Korea ITMC, Mirae Asset, Hi, Dongyang and Dongbu AMC; joint ventures Hana UBS, IBK SG, Woori CS, Shinhan BNP, Nonghyup-Credit Agricole; and wholly owned foreign players Prudential Financial and ING Investment Management.