It is unusual to find a fund manager with $1 billion in Asian equities with an intimate knowledge of Kosdaq, South KoreaÆs second board. Until the explosion in internet stocks last year, the five-year-old market had few followers. The exception may be Peter Irving, the mild-mannered CEO of Atlantis Investment Management in London. He has $300 million invested in Korean equities, including a small-companies fund and a Kosdaq fund. Atlantis has a further $700 million in Japan, and recently opened an office in Hong Kong. Irving spoke about his Kosdaq fund to FinanceAsia.com.

Q: What are the risks of investing in a Kosdaq fund?

A: Cashflow problems will come to light. Lehman Brothers recently issued a report suggesting Amazon could run out of money next year, so everyone is going to find it hard to raise new capital. As a result, we have become more discriminating about buying technology stocks. We want to invest in companies with prospects of real growth, not those reliant upon more capital raising.

Q: Can you find that in a Kosdaq fund, though? TheyÆre all tech start-ups.

A: Actually there are enough companies on Kosdaq that have the conditions investors want. There are over 500 companies listed and some are generating real profits. WeÆre very excited by the prospects for them. We avoid those with high risk and concentrate on those that are generating cash, or have strong prospects of generating cash within a year or so.

Kosdaq has become important in Korea because the banks are restricting credit to these companies. Kosdaq allows them to raise capital without the restrictions required to get a main board listing. ItÆs become a serious market: the volumes can be higher some days than on the main board. The risk of young companies is not a serious issue. Korean companies have just as much a chance of going bust on the main board as they do on Kosdaq. And the liquidity has been pretty good.

We also have 30% of the Kosdaq fund in pre-IPO companies. Many of these are still in the process of listing, and some will list by the end of this year. Our biggest pre-IPO holding is LG Telecom. ThatÆs going to be a $1.5 billion company. British Telecom is another stakeholder. ItÆs been trading in the grey market at over W40,000 ($35.93) per share, and we got it at around W30,000.

Q: Has the volatility of tech stocks led to any redemptions in the Kosdaq fund?

A: No, because the fund is closed until March next year.

Q: What have been the best opportunities for investing in Korea?

A: So far this year foreign activity has put a net of $8 billion into Korea, which is the largest foreign inflow to any market in Asia outside of Japan. But itÆs all been into basically three stocks: Samsung Electronics, Hyundai Electronics and SK Telecom. Everything else has been peripheral. As far as foreigners are concerned, theyÆre looking at a handful of stories, and theyÆre either in or theyÆre out.

Domestic investors were active in telecom stocks and Kosdaq earlier in the year, but they got their fingers burnt when the Nasdaq fell in April and May, so theyÆve run off to the sidelines and are licking their wounds. Meanwhile, institutions in Korea have been selling to meet redemptions. ThatÆs the pattern of the first half of the year.

Going forward, thereÆs tremendous value in Korea. WeÆre essentially value investors, and what weÆve seen is the economy continue to grow as corporate profits come through, and shareholders are neglecting a vast area of the market. Clearly there are risks. Will the government be able to pump liquidity into the system? On the other hand, to what degree will the government interfere in the market? When they pulled the [American depositary receipt] offering for Posco [Pohang Iron & Steel], they wanted a better price. As far as weÆre concerned, we can see the value there, but at the moment investors are a little confused about where to put their money so they keep it in the bank. There are companies to buy but we think the market will trade in a box for a while.

A lot depends on what happens on Wall Street. There are no real economic reasons why the market has to come down from current levels, not just in Korea but across the region. We see the possibility of a slow, gradual recovery in Japan, which indicates share prices should rise. But in the short term, thereÆs too much uncertainty. People donÆt know quite which way to jump.

Q: How seriously do other foreign investors look at Kosdaq?

A: Since two or three companies, like Daum, got onto Morgan Stanley Capital InternationalÆs indices, foreigners have paid a bit more attention to the bigger names on Kosdaq. But the rest of it is ignored.

Q: But arenÆt I better off just investing in a handful of top Kosdaq or KOSPI companies?

A: The top three or four stocks are incredibly volatile, which is all right if you can follow them all the time and can trade them. But most investors donÆt want to spend their lives doing that. Our funds offer a pooled vehicle. That volatility is not just Kosdaq companies, either. There are days when Samsung Electronics is up 8% one day and down 10% the next, and the interday swings can be even higher.

Q: Are there any upcoming IPOs that look exciting?

A: Kookmin Credit, a big credit card company, is coming up. That should probably have a $1 billion market cap. There are a few others. The main problem is there are so many companies looking to raise capital. There are going to be a lot of rights issues. It could all put a lid on the market. Bank cash reserves are quite high and thereÆs a lot of liquidity that could go into the market, but at the moment confidence is not so good. I canÆt see why a virtuous cycle should kick in over the next few months. KOSPI will probably trade between 750 and 1,000 for a few months. I donÆt see the catalyst that will make people put money into the system. Even if the market goes up, more companies will look to raise new equity and that will put a lid on it.

There are also deals coming from the government û privatizations, an additional divestment of Korea Telecom and Korea Electric Power. Quite a lot. Pricing could be an issue, however. The government always wants to get a premium. But some of these companies arenÆt worth it, and investors are taking a view that thereÆs no rush to buy if the market is not going anywhere.

Q: WhatÆs the quality of research and broking in Korea?

A: We do our own research. By the time brokers know something, weÆve already bought or sold. In Korea the focus of research is on six or seven blue chips, and thatÆs about it. BrokersÆ main clients are the big pension funds and thatÆs what they want. For us, small-company specialists, it doesnÆt help. We use a lot of smaller local brokers for execution so we can avoid attention. Some of the stocks we deal in are illiquid.

Q: Has the recent meeting of the two Kims had any impact on investing?

A: There are worries in Korea about the costs of unification, having seen what happened in Germany. South Korea is not in a position to fund it, and it will be a long time before any economic benefits filter to South Korean companies. Peace will be piecemeal. ItÆs a good thing but I wouldnÆt attach much importance to it as an investor.