Equity Holdings Cut As Stocks Fall

Volatile stock market trends have caused asset management companies to reduce their appetite for equities recently.

Chohung Investment Trust Management was recently found to have changed some of its equity funds into composite funds, lowering the amount of equities in their assets.

Chohung explained that the move was to guard the current profit rates of the fund, but experts point out that investors should have been notified of the changes.

Changing the Fine Print-

Chohung Investment Trust Management altered the nature of its equity type fund: “Best Long-term Housing Equities Investment Trust No.1” by changing it from an equity fund in July 2004 to a composite fund on January 31.

The proportion of the fund’s equities dropped from 96 percent earlier last month to 69 percent earlier this month. As a result, its performance was not badly hurt by recent rocky stock market conditions.

But it was discovered that investors had not been notified of the change in fund type.

When the Dong-A Ilbo investigated the matter, the company posted fund change details on its website on the afternoon of February 3.

An equity fund is a product with more than 60 percent of its assets invested in equities. The preponderance of these funds due to the bullish stock market was one of the reasons for the “fund investment wave” last year.

Composite funds contain a relatively higher rate of bonds, with equities accounting for 30 to 60 percent of their assets.

Kim Sung-gi, the head of the equities management division of Chohung Investment Trust Management, said, “We should have made the changes after notifying our investors, but due to internal circumstances, we had to make the necessary changes beforehand.”

Kim Dae-il, the firm’s product strategy team leader, said, “More investors entered due to last year’s fund craze for long term investment purposes. To prevent major discontent when experiencing a loss of capital, we altered the portfolio to a more stable composite-type fund.”

He continued, “We guarded the fund’s profits in this way. Clients that do not agree to this change will not have to pay short fees for pre-withdrawals.”

Ambiguous regulations-

According to the current Indirect Investment Asset Management Law, when important details regarding investor profits are altered, the details should be put to a vote at general investors meeting convened for this purpose.

But interpretations regarding “important details regarding investor profits” are ambiguous.

Park Gwang-chul, the director of the asset management supervisory department of the Financial Supervisory Service, said, “When asset management companies alter their funds from equity to composite-type funds, they should first get investor approval.” In other words, changing the nature of the funds is ‘highly relevant to investors’ profits’.

But the Asset Management Association of Korea says, “When changing the nature of the funds from equities to bonds, investors should be notified beforehand, but when changing from equities to composite funds the company may post a notice after changing the terms.

Kang Chang-hee, the director of Mirae Asset’s Investment Education Institute, pointed out that “the lack of precise rules may have a negative effect on investors’ portfolios.”

The lack of precision in the regulations may lead other asset management companies to change the nature of their funds without notifying investors beforehand.

Advised by the Financial Supervisory Service that their title was ambiguous, Sei Asset Korea altered the type of its “Sei High Dividends Balanced 60” fund from an equity-based to composite fund last year, and posted the notice on the web only.

The dropping proportion of equities is also becoming a point of discussion.

Last month, five asset management companies lowered fund equity levels by 10 percentage points or more, while over 20 companies lowered fund equity levels by five percentage points or more.

Woo Jae-ryong, the head of Korea Fund Research, said, “In developed countries where long term investment is more prevalent, asset management companies aren’t easily swayed into altering the percentage of equities in their funds.”

TK Sohn sohn@donga.com