Market rally double-edged sword for fund managers as investors exit

The South Korean stock market’s recent rally is both a blessing and a curse for fund managers as investors are increasingly exiting their funds looking for higher returns via direct purchases of securities.

The country’s benchmark stock index Kospi is heading toward record-high levels in recent sessions, driven by ample liquidity amid ultra-low interest rates.

Market analysts expect the main bourse and tech-heavy Kosdaq market to continue their uptrend into next year, offering individual investors a chance to make quick money.

The bullish market, however, couldn’t be worse for stock fund management firms, whose clients are leaving them to invest in stocks on their own.

According to market tracker FnGuide, about 4.17 trillion won ($3.77 billion) in index-following active stock funds have been redeemed or terminated so far this year. Some 181.7 billion won has exited such funds in November, reducing the size of local active stock funds to 17.88 trillion won from 21.87 trillion won in early January.

Fund redemptions have been growing in recent weeks with investors taking profit from handsome gains since mid-March when many shares hit yearly lows amid fears of the COVID-19 pandemic.

“Many investors who have realized their gains by exiting funds are directly re-entering the market to look for better returns. The rising stock market means higher returns for stock funds, but it also means higher redemption rates. It’s a funny situation,” said a local asset manager.

LEADING FUNDS IN TROUBLE

Mirae Asset Korea Health Care Securities Feeder Investment Trust 1 (Equity), a leading active stock fund, has yielded a return of 51.23% so far this year, but the fund’s size has shrunk to 64.8 billion from 80 billion won in January.

Woori Asset Management Corp.’s Woori Small-Mid High Dividend Fund, one of the best-performing dividend funds in Korea, also shriveled to 82 billion won from 122.9 billion won in January despite its year-to-date return of 40.6%.

Leading asset management firms run by experts with decades of a strong track record of investing in Korea are no exceptions.

Meritz Korea Fund I, the flagship fund operated by Meritz Asset Management Inc. CEO John Lee, saw a fund outflow of 143.9 billion won so far this year even after posting a return of 18.6%.

Assetplus Korea Rich Together I (Equity), launched by Assetplus Investment Management Co. Chairman Kang Bang-chun, has produced a return of 22.44% — double the average return of active local stock funds — so far this year, but the fund has dwindled to 109.6 billion won after investor redemptions of 37.3 billion won.

FUNDS FACE LIQUIDATION AS SIZE DWINDLES

Some stock funds even face liquidation as they fall below the critical 10 billion won level.

Shinhan BNPP New Growth M&S Cap Securities Feeder Investment Trust (Equity) has ranked high on the list for best-performing funds since 2018, with its year-to-date return of 29.2% this year. But its current fund size stands at just 8 billion won, teetering on the brink of dissolution.

Industry watchers say some local asset management companies are forced to sell some of their blue-chip stocks to meet investors’ redemption requests.

“Some fund companies cut their holdings for long-term investment only to make money needed for redemption. In the worst-case scenario, that pattern of stock selling could result in lower returns for their clients,” said an asset manager with 15 years of experience in stock investment.

Write to Eui-Myung Park at uimyung@hankyung.com
In-Soo Nam edited this article.