How Korea fund firms must adapt to succeed abroad

With life becoming tougher for Korean asset managers at home, the Korea Financial Investment Association (Kofia) is urging them to expand into emerging Asian markets. Hence the recent industry delegation that visited Vietnam in March, with more such moves potentially on the cards elsewhere in the region.

The chief executives of 30 Korean asset managers travelled to Hanoi and Ho Chi Minh City last month to meet regulators and executives in the local financial services community. The visit was arranged and led by the Korea Financial Investment Association (Kofia) to encourage Korean firms to consider doing business in Vietnam.

Before that can happen, however, some major, long-term changes are needed in Korea’s funds industry.

This is something of which Kofia chairman Hwang Youngkey is likely well aware. He is an urbane, globally experienced executive who has run domestic stalwarts KB Financial, Woori Bank, Samsung Asset Management and Samsung Securities. His vision for Korea’s asset management industry is for it to internationalise to save itself.

The macro picture suggests the industry can invest in such an expansion. Assets have grown to $679 billion as of end-December, by Kofia data, thanks to institutional expansion. That compares to $423 billion managed in 2010, or $181 billion in 2005. The past two years have also been profitable for boutique managers. Korea Investment Value, Igis, Quad and AssetPlus reported return-on-equity ratios of 40-55%.

But this is not the case for traditional big firms. Some enjoyed strong profits in 2010-12, including Korea Investment Management, KB Asset Management, Shinhan BNP Asset Management and Samsung Asset Management. But Kofia data suggest large players have not been the most profitable of late, and industry players complain times are tough.

AUM growth has come in the wake of loss-making years among established players due to crushing fee compression and fickle customers. Fund firms that sell well typically do so thanks to being part of a bank, brokerage or an insurance company: it’s the distribution platform that often wins, not the manufacturer.

Moreover, Korea’s economy has slowed, with GDP growth this year likely to be below 3%, compared with 5-6% until recently. Domestic interest rates are at new lows and slated for further declines. It makes it hard for these companies to grow at home.

One solution is to expand abroad, particularly into Asian nations still experiencing high economic growth that benefit from large populations and an expanding middle class. Some, such as Vietnam, are also reliant on direct investment from Korean companies. Hwang would like future initiatives to embrace China, India and Indonesia.

So can Korean managers develop local businesses in Asia’s consumer growth markets that enable them to tap emerging markets? For last month’s visit to spark meaningful changes, it will require some deep, long-term changes. AsianInvestor has the following four suggestions:

Improve English-language skills
Korea needs more people like Hwang who speak English well. This is not a strong point for Korean finance. Kofia may be well placed to organise language training, or lobby the government to support such an effort.

Facilitate more female involvement
There should be more opportunities for women in finance. The reality is big banks and conglomerates are unlikely to change soon, or with gusto; it’s more likely to be new companies or initiatives. Going abroad might fit the bill: Korean companies are littered with talented women who speak English, but whose career prospects are often stunted.

Enable overseas career development
Korean executives need to be free to develop careers overseas. Where Korean financial groups do operate abroad, their people come and go on two- or three-year contracts, often to be later shifted into unrelated positions. Institutional learning is lost. At home, this is not such a big deal, where institutions carry on through traditions, shared language and culture. But running a Saigon branch is different: success is more intimately tied with a manager’s ability to forge and maintain relationships.

Stick to a long-term strategy
For a Korean fund house to grow in a foreign market, it must stick to a long-term strategy. Korean companies have a long track record of pledging such a thing, but tearing that up once a new CEO or chairman comes in every couple of years. It takes 10 years for an experienced US fund house to break even in an Asian market. Korean companies will encounter the same. It means they really need to change their management culture if they are to make venturing abroad pay off.