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| Chang Ho-june, head of Standard Chartered Bank Korea's wealth management / Korea Times photo by Shim Hyun-chul |
SC Bank Korea's wealth management chief suggests portfolios focused more on stocks abroad
By Park Hyong-ki
There is a famous saying in the investment world and that is: "Don't put all your eggs in one basket."
In simpler terms, it means diversify one's income, savings and gains.
Renowned investors such as Warren Buffett take this to heart when it comes to value investing.
It has been important investment advice, in addition to knowing how to thoroughly read and analyze financial statements and key data before investing.
This is something retail investors here will have to work on as well.
If Chang Ho-june, head of Standard Chartered (SC) Bank Korea's wealth management, is given a chance to give more advice, he said he would like to "urge" Koreans to diversify by investing more in overseas stocks.
This would help them accumulate wealth and better prepare for their post-retirement lives in a super-aged society.
He said this cannot be said enough, even though Koreans have increased their investment in overseas stocks and bonds over the past years.
Still, a majority of their money, or more than 60 percent, is tied to real estate assets, either trying to pay down their debt or saving money to buy an apartment.
This is fine as long as there will not be any abrupt instability in the real estate market.
About 30 percent of people's assets are being kept in bank deposits. The rest are used to invest in financial assets.
"We are not going to see interest rates climbing to 4 percent and 5 percent like in the old days. Although we expect the U.S. Federal Reserve to hike its key rate twice over the next 12 months, such an upward pace will be slow, and it would be nowhere near 5 percent," Chang said in a recent interview. He is also the managing director of SC Bank Korea.
In line with the Fed's pace, the Bank of Korea is expected to raise its rate once in the same period.
Still, Koreans will continue to be living in a low interest rate era, not to mention facing slow inflation and slower wage growth.
But the good news is, despite the gloomy outlook, the stock dividend yield in the Korean equity market surpassed the rate of bank deposits for the first time last year, Chang noted.
"This is very meaningful because you will be able to gain just from stock investment, making up for low interest rates on deposits," he said.
Thus, he suggested Koreans increase their investment in overseas stocks, recommending allocating half of their monthly income into equities abroad via funds managed professionally by financial institutions.
"I often say half jokingly if you are a patriot, you should buy a Hyundai Motor car for your children. But when it comes to investing, you should buy overseas stocks," he said.
The Korean stock market cap is only about 1 percent of the total market capitalization globally, he noted.
"It does not make any sense when you think about this and see local people, even the rich, investing mostly in local assets," said SC Bank Korea's wealth management chief.
"Diversification overseas would further help them manage risk by facing less volatility at home."
Preparing for super aged
Koreans should not take this advice of diversification through overseas equity investment lightly, observers point out.
It seems to be true social circumstances make it more difficult for them to allocate their income and savings into higher-yielding stocks abroad when unemployment is high.
Koreans are known to work the longest hours after Mexicans among the members of the Organization for Economic Cooperation and Development (OECD).
But the aggregate period of their wealth accumulation through their jobs is a lot shorter than Americans, Europeans, and even Japanese and Chinese.
This is because men's mandatory military service and fewer career opportunities for female force them to start their jobs and gain income much later than their foreign peers.
Also, a majority face early retirement before 50 as companies restructure constantly to save costs whether the economy goes up or down.
They are facing the risk of working and accumulating less wealth, and a longer period of post-retirement. And this will result in slower growth.
And the country's low birthrate and aged population will make it worse for its economic output.
Korea became an aged society this August, as more than 14 percent of its population is aged above 65.
It is only a matter of time before it becomes a super aged society, which is expected to come faster for Korea than for Japan.
"It is very worrisome for everybody here. Longer life spans and the longer periods of their lives after retirement will increase their financial burden especially when interest rates are low," Chang said.
This is why he suggests building wealth through overseas investment.
Income-led growth
Chang said he is optimistic about the incumbent government's policy to increase wages for workers from stock market point of view.
This would certainly help them build their wealth.
Korea's income-led growth is also closely aligned with policies being pursued and implemented in the U.S. and Japan, he noted.
The U.S. has been seeking to increase the number of Americans who can qualify for overtime pay after working more than 40 hours a week.
Even though the rule on overtime pay differs state by state, it seeks to allow those who make less than $47,476 annually to claim overtime pay.
The threshold was lifted from $23,660 during the Barack Obama administration in an effort to increase job protection and consumer prices.
Japan is seeking to increase female and elderly employment as part of its policy to boost childbirth and maintain a population of over 100 million for the next 50 years.
"The policies in the U.S. and Japan are ultimately aimed at increasing employment and wages. Korea's policies are taking a similar path to them," Chang said.
50:50
The local stock market has mostly been moving within a certain range over the past few years.
Observers point out that it is particularly vulnerable to external shocks and risks including North Korea's missile provocations and nuclear tests.
With high exposure to foreign equity purchases and sales, the market runs the risk of sudden and abrupt capital outflows.
Changing and increasing one's overseas investment portfolio by regions such as the U.S., Europe and Asia would help a lot.
"A regionally diversified portfolio would certainly help reduce their risk exposure to volatility," he said.
He generally recommends equally investing half of their available money in overseas assets and the other half in local assets.
But Chang stressed it really all depends on a person's risk appetite.
"It is, foremost, important to find out and understand how much risk you are willing to take before creating and adjusting your portfolio," he said.
This requires not only an active study of how to read the market and financial statements, but also a person's investment preferences.
The equal share of investment in overseas and local assets is his conservative recommendation.
If a person is more conservative, then he or she should invest more in local assets, especially bonds rather than stocks that are less exposed to currency fluctuations.
But should a person have the appetite, he said he usually recommends a person invest 60 to 80 percent of their money in overseas assets, and the rest in local assets.
"Another thing is one cannot maintain such a portfolio without expert assistance, which can come in handy in gathering regional data," Chang said.
"If I may add another, SC Bank, with its global networks of professional advisers, can offer objective analyses and recommendations. Since it does not have an asset management subsidiary, it can further objectively assist and give fair assessments on funds by various financial companies."
SC Bank is also expanding its digital mobile service by developing and launching "personalized investment ideas" integrated with a robot advisory technology over the next two years.
Chang expects this will enable investors to gain customized knowledge, helping them more efficiently create their overseas portfolios through diversification.
"It will help them analyze massive market data, diversify their assets and make investment decisions according to their needs, and not be swayed by personal emotions," Chang said.
Before joining SC Bank Korea's private banking in 2005, Chang worked at consulting firms including Accenture and McKinsey & Company.
He graduated from the University of California Berkeley with an MBA in 2001. He studied at Seoul National University for his undergraduate degree in business.
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