Individually tailored equity portfolios may double in Korea this year as investors shift cash from index-tracking mutual funds, advisory firm Korea Creative Investment said.
Brokerages sold $1.2 billion of products to individual investors based on Korea Creative’s stock picks within a month of the company starting business Dec. 13, Seo Jae-hyeong, chief executive officer of the Seoul-based firm, said in a recent interview. Seo, 46, helped manage the nation’s best-performing mutual fund in 2007 when he worked for Mirae Asset Global Investments Co.
Stock accounts based on the recommendations of investment advisory firms grew to 5 trillion won ($4.5 billion) at the end of 2010, from 500 billion won a year earlier, according to data compiled by Samsung Securities Co. Total assets for mutual funds that predominantly invest in domestic stocks dropped to 61 trillion won from 75 trillion won over the same period, according to Korea Financial Investment Association.
“There is a need for tailored services from individuals who want better advice after losing money picking stocks themselves and from investors dissatisfied with mutual funds,” Seo said.
Samsung Securities, Korea’s biggest brokerage by market value, advanced 29 percent in the past two months as analysts increased their share-price forecasts, citing sales of individually tailored stock portfolios, known locally as wrap accounts. Korea Creative’s picks include Hyundai Heavy Industries Co., Samsung Electronics Co., KB Financial Group Inc. and OCI Co.
Unlike typical index-tracking equity funds in Korea, tailored products can be heavily weighted in favor of a handful of equities and target absolute returns. Investors can also get updates on their portfolios in real time rather than quarterly and account holders can request changes in individual securities.
“Wrap accounts may be eating away at mutual funds at the moment, but I think the popularity of them reflects increased interest in financial products in general, and both will grow in the future,” said Kim Young Joon, head of equity at NH-CA Asset Management Co. in Seoul, which manages the equivalent of $9 billion and doesn’t offer wrap accounts.
A model portfolio of stocks picked by Korean advisory firm Brain Investment Management Co. returned 51 percent last year, outperforming a 22 percent gain in the benchmark KOSPI stock index, according to Samsung Securities.
Steve Kang, a 33-year-old office worker at a flat-panel display maker in Seoul, pulled 30 million won out of his mutual fund accounts and savings bank in January and put it into a Daewoo Securities Co. wrap account that’s based on stock picks by Brain Investment. The product focuses on about 20 Korean companies, including Hyundai Motor Co., LG Chem Ltd. and Samsung Electronics, he said.
“I can check what’s in my portfolio with my smart-phone or on the Internet almost on a real-time basis, and get the sense of what they’re doing with my money, which I couldn’t get from regular funds,” Kang said in an interview on Jan. 18. “I may put more of my money in the account if the returns are good.”
Individual investors who made their own stock choices made an average return of 4 percent last year, compared with 22 percent for institutional investors in equities, according to a survey by Korea Financial Investment Association of 1,501 individuals and 132 institutions.
The Mirae Asset Discovery Equity fund returned 62 percent investing in Korean stocks in 2007, when Seo helped to select the portfolio of about 40 blue-chip companies. The KOSPI gained 32 percent.
Korea Creative, which currently has 18 staff, plans to hire more people, Seo said, without specifying how many. The company and four other advisory firms said they have hired at least 20 people from asset management companies since the start of 2009.
Still, any retreat in the KOSPI after gains in 2010 and 2009 could pose risks for clients in tailored accounts, said Song Hong Sun, a research fellow in Seoul at Korea Capital Market Institute.
“The focus on a small selection of stocks means wrap accounts can outperform index-tracking mutual funds when the market is bullish, but they are also exposed to potentially bigger losses if the market faces sudden shocks,” he said.
Seo counters that index-tracking funds have built-in risk as they are forced to hold stocks with heavy weightings in the index, even as the outlook for the company remains poor.
Seo didn’t give an exact figure for his forecast that individually tailored accounts may double, measured by funds invested, in 2011.
Samsung Electronics’ stock surged more than four-fold in the past decade, Hyundai Motor jumped 12-fold and Hyundai Heavy advanced 17-fold. The KOSPI tripled over the same period.
Korea Investment Holdings Co., the parent of the Korea Investment & Securities Co. brokerage which sells customized accounts, has risen 36 percent over the past two months. Woori Investment & Securities Co., which also sells wrap accounts, climbed 14 percent over the same period, compared with an 8.3 percent gain in the KOSPI index.
The number of financial advisory firms jumped to 136 as of Jan. 20, from 108 at the end of 2009, according to the Financial Services Commission.
Park Kwan-jong, who worked at Woori Asset Management Co. from May 2008 to March 2009, set up advisory firm Friend Investment Management in November and aims to attract 1 trillion won to tailored accounts advised by the firm this year.
“Star fund managers setting up their own investment advisory firms has played a key role in boosting the profile of wrap accounts,” Park, 42, said in an interview at his Seoul office on Jan. 7. “Investors are betting on the managers.”