Watchdog to urge asset managers to close weak, small funds

The Financial Supervisory Service (FSS) said yesterday that it wants to clean out the underbrush in financial markets here; small mutual funds, often sloppily managed and underperforming, have nevertheless been sprouting like weeds.

With bank deposit interest rates near the vanishing point, many Koreans, in preparation of life after retirement, have sought out alternative investments, and many have turned to these small funds, not realizing the often dismal returns they are getting there as well.

In response, the FSS said it would push fund managers to cut the number of small funds they operate and limit such funds to roughly 20 percent of the total value of funds they manage. A small fund, the FSS said, is one with assets of less than 5 billion won ($4.4 million) after a year of operations.

The FSS complained that asset managers tend to neglect these small investment pools, preferring to focus on their larger funds’ operations. It said that in the rush to give unsophisticated investors an alternative to bank deposits, many funds have simply copied offerings from competitors without developing a strategy to make then successful.

There is about 421.7 trillion won in these small funds as of May, the service said, up from 298.5 trillion won in 2011. Nearly 37 percent of all funds now operating in Korea are small ones.

Although managers can close a fund at their discretion, many hesitate to do so because of the possibility of complaints from investors, despite the poor returns. Before the end of this year, though, the FSS said it would press asset managers to either close many of their funds or merge them with other, larger investment funds they operate. The FSS said it would minimize investor losses by requiring managers to send text messages or other notices to investors before making any changes, although it was not clear what kind of losses they were thinking of.

Investors would be allowed to move their money in funds to be closed without paying commissions.

Fund managers themselves have complained about the difficulty in focusing on the operations of their smaller funds, saying there are just too many, and that one manager is responsible for overseeing as many as six funds. The FSS offered to help by limiting the number of investment pools a single manager could operate.

BY KIM HEE-JIN [kim.heejin@joongang.co.kr ]