Korea’s strange new market trendsetters

In the Korean stock market, there is usually a leader – one or a small handful of portfolio managers whose performance wows the rest of the pack. Right now, arguably that role is being held by a pair of investment advisory companies, essentially brokerage-type, private investment schemes. And questions are arising as to their investment skills.

These two are Cosmo Investment Management – which is owned by Japan’s Sparx Group and is well known to global investors for its long/short Korean equity expertise – and Brain Investment Management.

According to a report in the Chosun Daily, Brain’s wrap account suffered a -12% loss for the month of May, versus a drop of only -8.5% for the Kospi index.

This may be a mere blip. Brain’s performance for the first fourth months of the year was stellar: up 25.6% versus only 7.6% for the Kospi. Nevertheless, there are fears (as reported in the Chosun Daily) that Brain hasn’t changed its portfolio for an environment of rising interest rates and global uncertainties.

The herd-like nature of investment in Korea suggests that many, perhaps the majority, of other brokerages as well as mutual-fund houses are trying to mimic Brain and therefore are also beginning to see poor performance.

The exception to the May underperformance has generally been foreign investors and fund companies, which are believed to have bet against last year’s top performers.

Although Cosmo is better known abroad, Brain has the bigger profile domestically. It was founded by K.Y. Park, the former CIO at Mirae Asset and lead portfolio manager on its famous “Independence Fund”.

He left in 2007, when Mirae’s performance and reputation was at its peak, to serve as CEO and CIO at Truston Asset Management, a boutique investment firm that has become a favourite among both local and global institutions (its clients include China Investment Corporation, although this mandate was won last year after Park left to set up Brain in April 2009).

These leading investment advisory firms made their mark in 2010, reportedly with sterling performance, using highly concentrated stock portfolios, sometimes with as few as seven securities, and usually restricted to liquid blue-chips.

Brain and Cosmo declined to comment to AsianInvestor, or disclose their performance figures, which as investment advisers can remain private.

This comes at a time of trouble for the mutual funds industry, which has suffered bad performance and relentless redemptions since markets crashed in 2008. The outflows were worsened by new regulations introduced in February 2009 that enhanced product suitability, but put a big dampener on distributors’ ability to move product. The funds industry saw net outflows of $12 billion in 2009 and further losses of $22 billion in 2010.

The investment advisers profited from their apparent nimbleness, their ability to tailor products for wealthy individuals, and because they weren’t tainted by the 2008 crash. As a result, Brain saw its assets under management explode, and it now manages over $5 billion. Cosmo’s AUM is now around $4 billion.

These two represent nearly 80% of all assets managed by investment advisers in Korea. To get an idea of just how dominant they have become, consider there are over 130 such companies. Many of these are new, me-too players.

The dominant duo, meanwhile, continue to rack up successes. In 2010, Brain increased its net income to $20 million, up 444% year-on-year, while Cosmo brought in $11 million, up 38.7%.

There have been some concerns that several large Korean investment advisory companies have become too influential in the local equity market. These worries have been compounded with some of these large companies performing worse than the Kospi during the recent stock market downturn.

Now even the National Pension Service, with nearly $300 billion of assets under management, says it will allocate more mandates to investment advisory companies this year. Around 50 such companies meet NPS’s eligibility requirements, including Brain and Cosmo, and NPS has indicated it will give mandates to five, up from the two that are already on NPS’s books.

These mandates are small, just around $30 million each, but the fact that NPS is growing this is a sign that investment advisers are enjoying rising stature, and competing more with fund managers.

This push is also helping Cosmo achieve its goal of becoming an asset management company as well; its application has just been approved by the Financial Supervisory Commission, enabling this firm to play in both the brokerage and the fund arenas.