Fund manager sees more money moving abroad

Korea’s biggest fund manager predicts the nation’s investors will add to record holdings of foreign debt after a surprise interest-rate cut eroded local returns.

Overseas investments reached an unprecedented $63.3 billion in bonds and $143 billion in stocks last year, the Bank of Korea reported on March 5. Insurance companies and asset managers led the $18.3 billion increase in debt holdings in 2014, the second biggest jump since the BOK started compiling the data in 1994, as local yields tumbled toward historic lows.

“The latest rate cut will deepen the concerns of institutional investors as their returns are already under pressure,” said Lee Do-yoon, chief investment officer for fixed income at Samsung Asset Management, which oversees 182 trillion won ($160 billion). “While we need to keep a certain amount of money in domestic bonds, we also need to seek more opportunities overseas,” including corporate bonds in the United States and emerging markets, he said.

The Bank of Korea’s decision on March 12 to join a global wave of monetary easing is prompting investors to look abroad to meet their targets. The 4.5 percent return on Korean insurance companies’ assets in June 2014 was less than the average 4.9 percent they promised their clients, according to the latest data from the Financial Supervisory Service.

The yield on three-year sovereign bonds sank to an unprecedented 1.86 percent on Monday, after the central bank cut its benchmark rate to a record 1.75 percent last week. The 10-year yield reached 2.21 percent in February, the lowest since 2000.

“Low yields are one of the reasons for the decisions by insurers and asset managers,” said Jung Sun-young, an economist with BOK’s capital flow analysis team. “The trend is likely to continue for the time being, though the amount of increase in overseas investment is hard to predict.”

Local currency notes handed investors a 2.3 percent return this year compared with 9.2 percent in 2014. Indonesian debt paid 5.7 percent in 2015, while holders of Russian bonds earned 8 percent.

The 3.8 percent gain in the Kospi this year in local-currency terms compares with increases of more than 22 percent each in Denmark and Germany, and almost 11 percent in Japan. In dollar terms, the Kospi has advanced 0.5 percent in 2015, compared with a 9 percent increase in Japan.

“Insurance companies should be worrying more about lower yields,” said Heo Do-il, the Seoul-based head of asset-management strategy at Shinhan Life Insurance, which has about 21.8 trillion won of assets. “Overseas investments have to be maintained. We need to look outside.”

The bulk of Shinhan Life’s investments are in foreign currency securities issued overseas by the Korean government, financial institutions and companies, according to Heo.

Bloomberg