Small and midsize equity funds make big splash

Since the beginning of this year, a total of 7.78 trillion won ($6.91 billion) has been withdrawn from equity funds. The Kospi has been rising and investors have been cashing out to profit from the recent hikes in the market.

But among equity funds, those focused on investments in small and midsize companies still attract investors as their profit rates have been going up sharply.

So far this year, so-called small and midsize funds have collected over 175.5 billion won and their average return is 21.2 percent. That is higher than funds investing in Europe, which average 18.1 percent returns.

The JoongAng Ilbo studied the three best-selling small and midsize funds: Hyundai Investment Low Price Securities Investment Trust Equity, TongYang Small-Mid High Dividend Feeder Equity and KB Small/Mid Cap Focus Feeder Equity.

Each of these funds employs a different strategy.

Among the three, Hyundai Investment Low Price Securities Investment Trust Equity has drawn a total investment of 113.2 billion won, making it the second most popular equity fund in Korea. Its rate of return is 36.25 percent, which means that an investment of 10 million won would earn 3.26 million won in just six months.

The secret to its success is its heavy concentration in growth stocks. A price-to-earnings (P/E) ratio shows how much a company is making compared to its stock value. The two other funds invest in stocks with an average P/E ratio of 20. For Hyundai Investment Low Price Securities Investment Trust Equity, the average P/E ratio is 58, showing the fund has been selecting stocks with share values much higher than earnings.

“We’re investing in companies whose revenue is expected to grow in the future, rather than choosing ones according to their current revenue level,” said Cho Hyun-sun, head of the equity management team at Hyundai Investment Asset Management. “We’re basing 30 percent of our decision on past and present performances, but 70 percent on future value.”

Another interesting strategy is that 60 percent of its holdings are listed on the tech-heavy Kosdaq, and it only invests in stocks with a share price of 25,000 won or less. Last year the equity fund invested in stocks whose values were 15,000 won or less.

So why invest in cheap stocks?

“In the case of cheaper stocks, there is a huge gap between the actual value and the price on the stock market as information is not updated or sufficient,” said Cho of Hyundai Investment.

Most of the investors buying and selling these shares are retail investors. Hence, information on the companies is not updated as frequently as it would be if institutions were more heavily involved. Some global funds, such as Fidelity Low-Priced Stock Fund, use similar tactics. When it kicked off in 2009, it reportedly invested 80 percent of its money in stocks that were worth $10 or less per share.

Investing in cheap Kosdaq-listed stocks has the potential for huge growth. But huge losses are also possible. In order to hedge the risk, Hyundai Investment Asset Management invests in exchange-traded funds (ETF). In this way, the equity fund diversifies its large-cap holdings with less risk than if it invested large chunks of money in individual stocks. As of March, Hyundai Investment Low Price Securities Investment Trust Equity fund had invested 1.4 percent of its assets in the Kodex Leverage ETF.

KB Small/Mid Cap Focus Feeder Equity uses the opposite strategy. The equity fund by KB Asset Management has attracted 87.3 billion won and invests in value stocks, rather than growth shares.

Unlike Hyundai Investment, KB’s equity fund invests in stocks that it believes are undervalued despite strong performances. The fund is managed by Choi Woong-pil, head of the value management department at KB Asset, who is famous for managing one of the nation’s three most popular value stock funds. As a result, the price-to-book ratio (PBR) is the lowest among the three small and midsize equity funds. When the ratio is less than 1, it means the stock value is far below the book value of the total assets of the company.

Only 33.6 percent of the stocks the fund invests in are listed on the Kosdaq. This is the smallest ratio among the three equity funds. Choi said his investment principle is to not invest in stocks whose value has been rising due to expectations of growth compared to its actual performance, or stocks that are held for a short period by investors. Investments in bio and IT shares are also small. The fund’s profit rate is 15.1 percent, the lowest of the three.

“The idea of high risk-high return also applies to funds,” Choi said. “[Investors] should not focus simply on the profit rate but should see if the [fund’s] profit rate has been stable over an extensive period.”

TongYang Small-Mid High Dividend Feeder Equity has attracted 98.8 billion won so far this year. It invests 70 percent in small and midsize caps and the remaining amount on dividend stocks. These are stocks with high dividend returns compared to their stock values.

The average market capitalization of the stocks this fund invests in is 3.1 trillion won, which is higher than the other two funds’ average of 1 trillion won. This is because TongYang also invests in major large caps such as Samsung Electronics and SK C&C. It also invests 1.16 percent of its money in AmorePacific, whose stock value this year has gone through the roof. The reason this fund invests in such major stocks is because of risk management.

“Small and midsize stock investments have high profits but they also have high volatility,” said Choi Young-chul, who manages the fund at Tong Yang Asset Management. “We included dividend stocks to hedge this risk.

“As it’s a hybrid type of fund, it can’t take the No.1 spot on profit but it surely can maintain a stable profit rate.”

Will small and midsize funds continue to show strong performances? Analysts say the Korean economic structure has been shifting from a focus on conglomerates and mass production to small and midsize companies with a small amount of production but wider variety of opportunities.

“For those who wish to invest in a more aggressive investment style with high returns despite huge risks, Hyundai Low-Price Fund is appropriate but for those who are conservative, KB or Tong Yang Fund would be better,” said Hwang Yoon-ah, a researcher at Zeroin, a fund information provider.

BY JUNG SUN-EAN [lee.hojeong@joongang.co.kr]