South Koreans drawn to unification-linked funds

June 1, 2014 5:41 am

South Koreans drawn to unification-linked funds

By Song Jung-a in Seoul

South Korean investors are pouring millions of dollars into unification-themed equity funds, reflecting local investors’ growing optimism over a unified Korea, although the chances of the two countries joining remain as remote as ever.

Such funds have emerged as an unlikely darling for Korean investors after President Park Geun-hye in her new-year speech compared unification to an economic “jackpot”, which has prompted an increase of discussion of national reunification in local media.

A combined net Won35bn ($35m) has flowed into two such funds over the past two and a half months in spite of volatile inter-Korean relations and Pyongyang’s warning of another nuclear test, while Won3.4tn has flowed out of the country’s other equity funds in the same period.

“The president’s speech has certainly affected investor sentiment, increasing people’s interest in unification,” said Huh Nam-kwon, chief investment officer at Shinyoung Asset Management, which runs a Won33.3bn equity fund named Shinyoung Marathon Unification Korea Stock Fund.

“Many rich individual investors now seem to agree that unification is needed for both countries although it is hard to expect when it will happen,” he said.

Shinyoung’s unification-tied fund has posted an investment return of 6.8 per cent since its launch on March 2013, outperforming its peer domestic equity funds, whose average return stood at 3.44 per cent, according market researcher KG Zeroin.

The asset manager targets more than 15 per cent of annual returns for the fund, which invests in roughly 70 companies in sectors that are likely to benefit from unification, such as construction, utility, farming and garments.

Joining the trend, Hi Asset Management launched “Hi Korea Unification Renaissance Stock Fund” earlier this month, which has attracted inflows of about Won1.2bn since May 15. The fund has posted a -0.5 per cent return to date, but Kim Young-jin, Hi’s senior fund manager, is confident that the fund can beat the market’s performance in the long term.

“Unification will bring greater synergies, combining the South’s capital and technology with the North’s cheap labour and natural resources,” said Mr Kim. “Inter-Korean economic co-operation is bound to increase with North Korea getting poorer and more isolated and South Korea suffering from lower growth and higher wages.”

Jim Rogers, a billionaire investor, predicted in February that unification would be possible within five years and help Korea grow exponentially. Mr Kim is hopeful that more inter-Korean economic projects would arise, such as the Kaesong industrial complex, where about 150 South Korean companies run factories, and an inter-Korean railway could be built, should relations improve.

However, many people remain sceptical about the possibility of unification, given the growing economic gap between North and South Korea and the huge costs that South Koreans have to shoulder.

“President Park has suddenly made unification a positive thing by highlighting economic benefits and ignoring the huge costs involved,” said Park Sung-hyun, strategist at Hanwha Investment & Securities.

“But I am not sure whether the idea of unification will lead to more corporate investments in related areas. Things may not turn out to be as they imagined because it is a complicated matter.”