Shift of Money to Investment Irreversible
Chairman of Asset Management Association of Korea
The domestic fund market has recently exceeded 266 trillion won in total assets under management (AUM), and has reached nearly 300 trillion won in net asset value. This demonstrates a significant shift in investors' sentiment that had shunned fund investment even four or five years ago.
The local fund market, which had once prospered on the back of the ``Buy Korea'' boom in early 1999, got into a big trouble by halving the size of market in just one and a half years due to the collapse of Daewoo corporate bonds. Since then, hit by SK Global's account fraud and credit card companies' liquidity problems in 2003, the market had hovered at around 150 trillion won in AUMs.
In the meantime, Indirect Investment Asset Management Business Act (IIAMBA) established to consolidate fund related laws in 2004 has put stricter criteria for risk management and disclosure requirements, thus enhancing the credibility of funds.
In addition, new type of funds have sprung up as the range of permissible investment assets has expanded to real estate, derivatives, and fund of funds from stocks and bonds. Major banks started to launch fund distribution in earnest amid a continuing low-interest rate trend and weakening "flight to safety" that has been around since the financial crisis that battered Korea in 1997.
In particular, funds gained more popularity among retail investors thanks to banks' aggressive marketing activities to promote fund investing via installments or regular savings plan (RSP). Monthly payments of 100,000 or 200,000 won made funds, traditionally viewed as the exclusive preserve for the wealthy, an affordable investment, and helped those who were comfortable with principal protected products offered by banks to turn their eyes towards funds.
The availability of RSPs has become a driving force behind the steady inflow of money into fund markets, especially equity funds since 2004.
The AUMs of RSPs, which stood at 6.5 trillion won at the end of March 2005, when the Asset Management Association of Korea (AMAK) started to compile data, has reached 34.5 trillion won as of the end of June. And the number of RSP accounts, which is around 9.82 million, is expected to exceed 10 million in the near future.
Although RSPs in the overall funds market accounts for only 12 percent in AUMs, it represents more than one third in the equity fund sector _ AUMs total 79 trillion won.
The size of the domestic funds market has continued to grow by more than 10 percent in the past two years from 187 trillion won in 2004 to 204 trillion won in 2005, to 235 trillion won in 2006, and to 266 trillion won as of August 2007. The number of fund accounts has increased greatly from 3.61 million in 2003 to 15.88 million as of the end of June in just three years. This leads us to believe that every household owns one fund account on average by comparing the number of accounts with the estimated number of households (15.99 million) in 2005.
First, Korean investment culture, where short-term investment was prevalent considering record-high turnover rate in the past, viewed even a one-year investment period as a long-term investment. The period however has lengthened to three years, even to 10 years thanks to popularity of RSP type equity funds with an investment period of three to five years.
Second, the long-term investment culture has helped investors to prefer equity funds to others. Equity funds, which had stood at mere 3 percent of the 138 trillion won in the whole funds market in 2000, broke through 10 percent for the first time in 2005 when RSPs started to gain momentum. The equity fund's AUMs that represented 19.84 percent at the end of last year has risen up to 28.73 percent, or 76 trillion won, as of the end of July.
Compared to advanced countries such as the United States or United Kingdom where equity funds represent more than 50 percent of the whole funds market, local equity funds still lag behind in its size. Yet, it is encouraging to see that it is growing steadily.
Increasing retail investor's participation in the capital market is also dramatic. The ratio of retail investors versus institutional investors in the funds market, which used to be 3:7 in 2002, has recently been almost equalized at 48.86 percent to 51.14 percent, respectively.
The popularity of foreign investment funds has helped to broaden the horizon of the local funds market as well. AUMs of foreign investment fund which recorded only 6.3 trillion won at the end of 2005 has tripled in a year to 17 trillion won thanks to a stock market upturn in emerging markets including China and India, and has tripled to over 53 trillion won compared to the previous year thanks to the government's decision to exempt capital gains tax on earnings from locally domiciled overseas funds.
Of course, a cannibalization effect should be taken into consideration as local investment funds are likely to be replaced by foreign investment funds to some degree due to the tax benefits. It, however would serve as an opportunity for local asset management companies to turn their attention to overseas markets, and for local investors to diversify their investment.
Investors could take ``flight to safety'' stance for the time being due to the U.S. sub-prime mortgage meltdown. Nevertheless, I firmly believe that the trend shifting ``from savings to investment'' and ``from direct investment to indirect (fund) investment'' are not likely to be reversible as long as low-interest rate and low-growth tendency remains and the aging of society continues in Korea.