Capital Flight Worries Fund Dealers

Securities dealers in Seoul’s Yeouido are cautiously raising the possibility of an “exodus in fund capital,” expressing their concern over the substantial turmoil that may occur if installment fund subscribers withdraw their capital all at once next year.

In fact, the maturity of a fund product is fundamentally different from that of time deposits or regular savings accounts. Fund subscribers have to initially maintain their investment for a certain period of time (most funds do not charge redemption commissions after ninety days) but after that, they can retain it for as long as they wish. In other words, they can extend their fund investments as much as they want to.

However, Woo Jae-ryong, head of Korea Fund Ratings, commented, “Few investors understand that maturity does not really apply to funds.”

“Many may decide to take out their capital after three years or so, even if they have changed to a different fund product,” said Woo, “In such a case, the stock market may wobble until the money is injected into the market once again.”

KB, the largest seller of installment funds, will have 1.2 trillion won of such funds marking three years since subscriptions next year. For overall funds, the same figure climbs to 1.4 trillion won.

However, nobody can anticipate how much of it will be redeemed, as it is a first for the industry.

“It is hard to predict what actions subscribers will take when the funds reach maturity dates,” explained manager Lee In-young of the Investment Trust Product Department at KB. “We are seeking ways to respond to draw in money again, such as by suggesting that clients extend the fund timelines or by developing new alternatives to fund products.”

Lee Chae-won, Managing Director of Korea Value Asset Management, predicted that people would take out their money in both a weak stock market to stop further losses, and an excessively strong one to cash in their gains. “The industry must be prepared as redemptions may occur in either case.”

Despite these fears, some still believe the coming maturity will not impact installment funds significantly. “Since there are no viable alternative investment tools, subscribers won’t redeem everything just because the funds reach maturity,” said Kim Seh-jung, head of Investment Strategy Team at Shinyoung Securities. He flatly rejected the possibility of a “fund exodus,” explaining that new capital will flow into the stock market next year, starting with the National Pension Service investing an additional six trillion won in stocks.

Capital Inflow to Stock Market on a Decline-

Installment funds had been a strong bulwark for the Korean stock market this year. The net selling (amount sold minus amount bought) in the domestic stock exchange by foreigners recorded 10.9324 trillion won up to November 6 this year. Stock prices were able to remain largely stable despite such a large outflow thanks to the absorption of the capital by installment funds, which account for 60 percent of all stock-type funds.

Indeed, as stock-type installment funds brought a total of 10.705 trillion won into the stock market this year, they took in more or less the entire amount sold off by foreign investors.

One concern is that the new capital flowing into installment funds is rapidly declining, falling from more than 1 trillion won a month until July down to 826 billion won in August and 576 billion won in September. October will have recorded even worse numbers due to the repercussions from a slack stock market.

Researcher Oh Hyun-seok at Samsung Securities explained the phenomenon as the stagnant stock market pushing some investors to begin redeeming their capital. “More investors are switching to overseas funds,” he added.

Some also point out that the real estate market, which is on a surge right now, is also siphoning funds away from the stock market.

“Having been the main source of capital until now, signs of installment funds drying out may disrupt the Korean stock exchange,” securities experts said. “When the stock market rebounds as consumption picks up and business performance improves, the number of fund subscribers will also start growing again.”

ssoo@donga.com