South Korean investors have remained remarkably firm in the face of market downturns across many asset classes this year. But some fund management executives in Seoul worry that investor sentiment is turning a corner.

Until two weeks ago, the funds industry continued to enjoy net inflows. Counting public and private funds (ie retail plus institutional fund mandates, not segregated accounts), the industry in Korea has grown by 21% year-to-date, to W360 trillion ($359 billion), according to industry data.

But this month has seen net redemptions outstrip gross sales for the first time, says Jeon Kil-soo, Korea CEO at Schroder Investment Management. The industry experienced a net outflow of W100 billion (about $100 million).

Even when the industry enjoyed net inflows, margins must have been squeezed, because there has been a steady exodus from international funds and balanced funds to low-fee domestic money-market funds, as well as to domestic equities.

ôNow overseas investments are in negative territory,ö says the country head of one international fund house. ôInvestors want out.ö

Even internationally the damage is not absolute. Funds with heavy exposure to China, India and Vietnam are experiencing heavy redemptions but those exposed to Brazil, Russia and the Middle East continue to perform well. SchrodersÆ Bric funds, for example, have been able to retain assets by overweighting Brazil and Russia.

Some fund execs fear investor sentiment is nearing panic, however. If inflation and oil prices continue to rise and many major stock markets continue to experience losses, the industry might face a ôfund runö, as execs in Seoul put it. Many investors are novices who have, over the past five years, only enjoyed upward market trends. They often came out of banks and are naturally conservative, with many (sensibly) investing via regular instalment plans.

But bank distributors are now under a barrage of investor phone calls. Distributors are trying to calm nerves and tell people to think long-term, but if investors think they will remain underwater for three to five years, old habits may kick in.

ôNo one knows at what point investors might capitulate, but weÆre nearing that point,ö warns Hong Choi, CEO of ING Investment Management in Seoul.

And although retail remains the big concern, some execs say institutions are also capable of panicking.

Others are more sanguine. SchrodersÆ Jeon points out that a net outflow of W100 billion is a very small amount, and he doubts domestic equities û which have enjoyed a robust inflow this year û will experience a ôfund runö. Rather money is headed for cash products to wait out the turbulence before heading back into equities, he suggests.

Also, most investors may be scared but they havenÆt been completely burned.

ôI often hear it said that æpeople have lost a lot of money this yearÆ,ö says David Proud, country head at Fidelity Investments. ôActually theyÆve made money.ö

Anyone who invested before the marketÆs peak in October will still be in the money, and so he is optimistic that investors will return to equities û although he suspects it wonÆt happen in the third quarter, which looks to be a rough period for fund managers.

Fund managers are looking at how to help investors as well as boost their own business. Some are considering products such as inflation-hedged equity funds (picking stocks that may benefit from inflation), global equity products featuring developed rather than emerging markets (to which Koreans are vastly underweight), and structured products that limit downside performance.

But any international fund is going to be a hard sell in this climate. The one area that has enjoyed healthy inflows: domestic equities. The Korean stock market is also losing value, but not as much as its North Asian neighbours, and it offers that false comfort of home bias. Domestic equities have enjoyed a net inflow of 22% year-to-date, industry wide. But not everyone is benefiting from this.

In fact, only one fund manager is really doing well, taking in 50% of those assets. Competitors acknowledge this through somewhat gritted teeth. Having seen Mirae Asset launch a $4 billion Bric-like fund at the peak in October û itÆs mostly weighted towards China and India û they thought its reputation might take a blow, now that its Insight Fund has lost something like 30% of NAV. Mirae was the big winner over the past few years in Korea thanks to its aggressive moves into Asian and global emerging markets.

Mirae remains KoreaÆs number-one fund house in AUM and branding power, thanks to its grip on domestic equities as well as international emerging markets. So far, the bull runÆs leader is proving to be the main beneficiary from the correction as well.