Korean junk-bond funds? No thanks

Korea's government wants to energise the local high-yield market but hasn't seduced fund managers and distributors.
South Korea's Financial Supervisory Service is trying to jump-start the nation's high-yield debt markets by expanding tax breaks on funds that invest in them. But distributors and fund managers don't want anything to do with the asset class.

"Distributors are allergic to the words 'high yield'," says Hwang Sung-ho, president at PCA Asset Management in Seoul.

The FSS has announced investors will only be levied 5% of capital gains on junk bond funds for up to W100 million ($106,000) per investor. It is keen to not only give investors comfort in investing in alterternatives to equities that can also provide attractive returns, but also to help companies raise financing through local capital markets. Many small companies and start-ups struggle to obtain bank financing and could benefit from a more developed credit market.

But the existing market is tiny and illiquid, says Cho Han-yong, deputy general manager for product development at the private-banking division of Samsung Securities.

Cho adds that the tax incentive isn't actually that attractive. "Retail clients can only get W100 million worth to invest in high yield, but they are looking to invest in sizes of W1 billion or W10 billion."

Distributors also have bad memories of the days when they were bloated with bond and money-market funds, including high yield funds, many of which suffered badly during the 1997-98 Asian financial crisis. "This industry was badly burned," notes Lee Kuenmo, vice chairman at MiraeAsset Securities.

As a result, both distributors and fund managers concentrate on developing their equities and overseas investments. "Fixed income is not a focus for us," says Yoon Dong-sup, general manager of product development at Korea Investment & Securities.

A number of big domestic fund houses, including the likes of Samsung Investment Trust and Korea Investment Trust, will launch some new products to cater to the new tax breaks. They do believe there is a long-term need for the embryonic corporate pensions market to have exposure to fixed-income products. But retail distributors don't plan to launch any marketing campaigns.

Rather the emphasis will continue to be on equities, especially international equities - where returns remain attractive, and in which, for Korea-domiciled products, the government is also scrapping capital-gains taxes.

For an analysis of the Korean retail funds market, see the upcoming April edition of AsianInvestor magazine.
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