Korea Capital Market Institute

In a broad sense, asset management industry includes investors, asset markets and asset management company as an intermediary between them. Thus, the internationalization of asset management industry can be defined as the status of investor’s capital flows   to asset markets taking place at different countries via asset     management company.
The internationalization of asset management industry has     various channels. This study focuses on the following three channels to set the directions for the internationalization. First, the role of Korean asset managers should be improved by invigorating the  overseas investment of domestic investors. Second, Korean asset management company should aggressively create the demand of  foreign investors. Third, we need to promote the financial center specialized in asset management. The primary goal of this study  is to provide the necessary tasks and strategies for achieving the above three directions.
Then, why is the internationalization of asset management industry important? Rapid population ageing leads to the conflicting results of a marked decline in the rate of return to investment and massive accumulation of retirement assets. Thus, domestic investors should come forward to invest overseas for efficient management of retirement assets with the help of special advisors. Considering that domestic customer base is not sufficient for the growth of Korean asset   managers, they should create foreign customer demand for the    long-term stability. The internationalization is also important for    Korean asset markets. The advancement of inbound internationalization means the internationally renowned asset managers and institutional investors becoming an active player in the Korean market. It may contribute to the improvement of Korean asset market by providing high quality information and creating the long-term asset demand.
The overseas investment by domestic investors has been growing, but there has been little change in the home bias. The investment pattern of individual investor is shifting from the indirect investment via asset managers to direct one. Especially overseas equity fund  investment of individual investors, once exploded in the middle of 2000s, has stagnated since the global financial crisis by the following factors. In terms of policy, as the tax exemption on overseas investment fund ended in 2010, the rich investors substantially exited from the overseas investment. For the problems pertaining to the asset     managers, their offered products were heavily inclined to specific regions and asset classes, which are rarely changed today. This   may result in the loss of investor’s confidence on the domestic   asset management company. Thus, the reformation of tax treatment on fund investment and capacity building of asset managers are  important factors to send the individual investors back to invest overseas. While the Korean government already acknowledged this  problem and decided to reintroduce the tax exemption on capital gain from overseas equity fund, this tax benefit should be settled down permanently. In addition, government should reduce the difference in tax treatment between overseas and domestic investment funds. At the same time, Korean asset managers should strive for developing new investment products and building management capacity by investing human capital and high quality management system. Importantly, the diversification of asset regions and classes is a must-do.
Recently, overseas investment by institutional investor has substantially increased. Most of pension funds including National Pension Service of Korea share the view that a fast-growing reserve should not be invested entirely on low-interest domestic assets. Still, the role of domestic asset managers in institutional investor’s overseas investment is very limited, which mainly results from the incompetence for overseas investment of domestic asset managers. Institutional investors including public pension funds consider management philosophy and system as well as management performance as a basis for stable investment, choosing consignment managers for overseas investment. Thus, Korean managers are in disadvantage due to the relatively short business history and the lack of capacity to meet the investor’s mandate for the multi country and multi asset class portfolio.
While the capacity building such as investment for human capital and management system is required for domestic asset managers to play a substantial role for overseas investment of institutional investors, we need to find a way to the partnership plan for mutual growth of institutional investors and Korean asset management company. The introduction of rookie managers for consignment management is a good example. At the same time, the obstacles for public pension funds to overseas investment such as the governance and short-term oriented performance evaluation should be removed.
For recent years, domestic managers have strived for overseas expansion, even though solid foreign customer base has not been made yet. Korean managers barely utilized UCITS fund as a vehicle for cross-border fund exports. Overseas expansion has been confined to the intermediary role for fund management to serve the domestic customer. The biggest obstacle for creating foreign customer lies at the lack of understanding. Major asset management companies which enjoy a considerable profit from domestic operation do not identify the need for overseas expansion. Thus, the management profits tend to be paid to shareholders as a dividend rather than retained them for future growth, which in turn makes asset managers with relatively long business history focus on domestic market due to the lack of capital for overseas expansion. Thus, various options for raising capital such as retained earnings, issuing new stocks and debts should be considered. Of course, upgrading corporate culture and organization for overseas investment should go side by side.
While there are few impediments to creating overseas demand in terms of regulation, the treatment of corporate type investment trust as a general corporate body is the one of biggest obstacles among the remainders. If a domestic manager set corporate type trust in U.S. or Europe, it should follow all the regulations related to financial holding companies act and foreign exchange trading act, because the fund is regarded as a foreign affiliates.
The asset managers also consider how they actually expand into overseas market; the green field investment of building new affiliates or branches and the brown field one of purchasing the existing firms to serve the target market. Literature study on the cases of global asset managers to extend their business abroad tells the following implications. First, the globally renowned managers were very cautious and conservative on overseas expansion even after being established in the domestic market. Second, they actually mixed the green field and brown field strategies properly. Third, the retail-oriented business model is not suitable for the green field strategies, because the penetration of foreign retail customers is very costly. These findings imply that the small scale green field strategy may not be a successful option for Korean asset managers with the lack of international awareness to pursue the retail-based model. Thus, domestic managers should consider the aggressive strategies, if they have an intention for overseas expansion. The possible business models may include 1) large scale green field investment with the reorganization of domestic operation, 2) fund exports via UCITS by purchasing boutique managers in Europe and 3) the acquisition of exiting medium scale managers in the target country.
Lastly, we turn to promoting the financial center specialized in asset management. There exist two kinds for this type of financial center; the hub type such as Luxemburg and Singapore to connect the investors and asset markets, and the asset management oriented one such as Australia for asset managers to enter the market serving a large customer base. Considering the economic fundamentals    and market ecosystem, we believe that the asset management type may be more appropriate for Korea. The success of the financial  center specialized in asset management mainly depends on attracting the global asset management companies and the long-term        investment from global institutional investors to Korea. A number of global asset managers have entered the Korean market, but    small market size and financial regulation in Korea induced the   local affiliates of global asset manage company play a peripheral  role in the Korean asset manage industry. To build the financial  center in Korea, asset management market expansion, promotion  of private equity fund market through deregulation, improvement  in corporate governance, and open-minded perception about foreign investors  to enter the domestic market are required. Considering that the raised issues are mostly related to the government policy, the government should have a strong drive and determination to handle the impediments to the financial center in northeastern Asia.