Banks Promoting Affiliates’ Funds

Ms. Jeong (30, Donggyo-dong) withdrew 22 million won when the term of her time deposit expired in January of 2006, and invested in the “Gwanggaeto Ilseok Ijo Fund,” a fund operated by an affiliate of her bank.

The fund was recommended by a bank agent, who said “Top fund managers from our affiliate, KB Asset Management, are responsible for the fund, and Kookmin Bank’s executives are already invested.” However, the earnings rate dropped more than six percent in a month. Although she lost more than 1.5 million won, Ms. Jeong did not hesitate to cancel her account. She said, “I don’t regret it because the earnings rate is still the same even now.”

Fund sellers, including banks and securities institutes, are promoting their own affiliates’ funds.

Some financial companies even recommend affiliates’ funds whose earnings rates are lower than the industry average.

Popular Funds with Low Earnings Rates? –

Dong A’s reporting team visited twelve branches of four banks – Kookmin, Shinhan, Woori, and Hana – on January 26, asking each branch to recommend two stock funds. Most of the banks recommended funds operated by their affiliates.

The three branches of Hana Bank recommended affiliate DIMCO’s “Big & Style Fund” and “She & Style Fund.”

It was the same with the other banks. Woori Bank’s three branches all recommended Woori CS Asset Management’s “Frontier Dividend Hanareum Stocks,” while Shinhan’s two branches recommended SH Asset Management’s “Tops Fundamental Index Stock Investment.” One of the Kookmin Bank branches recommended “KB Star Industry Representative Stock Installments.”

Our analysis of the top ten stock funds sold by four securities institutes showed that Mirae Asset Securities’ top ten funds, Korea Investment’s top nine, Daehan Investment’s top five and Samsung Securities’ top five, were all operated by their affiliates.

Kookmin Bank sold 345 billion won worth of “Gwanggaeto Ilseok Ijo” and 264.7 billion won worth of “Gwanggaeto Stock,” both operated by KB Asset Management. These two funds were included in last year’s top twenty best-selling stock funds list. However, their earnings rates were in the bottom two or three percent of 327 stock funds worth over 5 billion won.

A source in the financial circle said, “One of the secrets behind the popularity of this fund is the active ‘support’ of Kookmin Bank, the bank with the largest sales network.”

Recommending New Funds Not Tested in the Market –

Most of the funds “supported” by finance companies are new funds operated by their affiliates. In many cases, the new funds have not yet been tested in the market.

Korea Fund Ratings President Woo Jae-ryong warned, “Advanced finance companies spend more than six months testing and selecting their main funds. There is high investment risk in new funds whose rates of return have not yet been tested.”

Many of one particular financial company’s top selling funds have low rates of return.

Shinhan Bank sold 800 billion won worth of “Miraedeun Stock Installments 1,” operated by SH Asset Management, even though its earning rate was minus two percent. Hana Bank sold more than 100 billion won worth of “Daehan Taegeukgon Stock Fund,” operated by Daehan Investment, an affiliate of Hana, even though the fund’s earning rate, at two percent, was below the industry average.

A source in Kookmin Bank said, “We can do no more than ask the operating company to restructure its portfolio when the main fund’s earnings rate is low. Customers need to manage risk and make their own judgments.”

larosa@donga.com aryssong@donga.com