Goldman Sachs’s recent exit from South Korea illustrates the problems global asset managers face in trying to build a viable presence in the country

June 2, 2013 5:41 am

South Korea proves tough market to crack

By Song Jung-a in Seoul

Goldman Sachs’s recent exit from South Korea illustrates the problems global asset managers face in trying to build a viable presence in the country. The dearth of domestic investment platforms and limited sales opportunities are proving a real stumbling block, experts say.

Eight of the 22 foreign asset managers active in South Korea suffered losses in the final quarter of last year. There is fierce competition over fees, with 84 fund management companies jostling for a bigger share of Asia’s third-largest funds market – a market dominated by local heavyweights that include Samsung Asset Management and Mirae Asset. But while foreign managers have suffered, the large domestic players, which also include KB Asset Management and Korea Investment Management, made millions of dollars in profits during the final three months of last year, despite challenging market conditions.“Most foreign asset managers do not have the domestic investment platforms needed and just focus on selling their offshore products,” says one executive at a global asset manager in Seoul. “They have failed to cope with changing market conditions because of a limited product line-up, while domestic players sell various funds.”

But thanks to the popularity of offshore equity funds certain global asset managers, including Franklin Templeton, Fidelity and Schroders, were able to make some inroads into the market before the global financial crisis took hold. Since then, however, offshore equity funds have increasingly lost their appeal due to poor performance.

The result is that many foreign houses have since suffered; Goldman Sachs being the latest high-profile victim. Goldman entered the market in 2007 through its Won160bn ($144m) acquisition of a joint venture set up by Macquarie and IMM Asset Management. But the business suffered a net loss of Won8bn in the October-December period of 2012 alone. It exited after five lossmaking years in 2012.

After Goldman announced its withdrawal, other foreign asset managers, such as Deutsche and BlackRock, which have experienced slowing growth in assets under management, have also been the subject of speculation that they too will leave the market. Both companies have denied such rumours.

“Local investors are more interested in domestic equity funds they are familiar with, while foreign funds continue to lose their popularity because of low investment returns from the so-called Brics and China funds,” says Lee Eun-kyung, a fund analyst at market research company Zeroin.

She adds that domestic equity funds posted average investment returns of 19.8 per cent over the past three years while offshore equity funds reported returns of minus 0.3 per cent on average.

The decline in popularity of offshore funds has been exacerbated by the removal of tax benefits for such vehicles, while the absence of a sales distribution network has also hindered the asset growth of foreign fund managers. The large domestic players, meanwhile, sell their investment products through the many branches of their affiliated banks and brokerages.

“It is hard for foreign asset managers to crack the Korean market because local giants dominate via the sales networks of their affiliates,” says Lee Gye-woong, a fund analyst at Shinhan Investment. “Companies content with their role as marketer of just their offshore products, which do not develop alternative funds, will continue to be marginalised.”

Foreign asset managers control 17 per cent of the market. Their combined net assets fell by Won60bn to Won53tn at the end of last year, while the assets of local asset managers increased by Won150bn to Won264tn over the same period.

But experts maintain the market retains an attraction for global asset managers, given the country’s increasing wealth, rapidly ageing population and ever-growing pensions market. They predict that the financial assets of Korean households will continue to grow. Indirect investment in funds is also expected to increase as Koreans prepare for life after retirement.

Indeed, among the foreign companies present in Korea, some groups, such as Allianz and Macquarie, have made sustainable profits by specialising in activist and infrastructure funds.

BNP Paribas is also one of the more successful global asset managers in Korea thanks to its local partnership with Shinhan Bank.

“The Korean market still has growth potential but foreign asset managers will struggle unless they diversify their businesses and engineer products tailored to local tastes,” advises another executive at a global asset manager.