Lured by volatile Kospi, investors ditch equity funds

[SHUTTERSTOCK]

Investors are pulling their capital out of Korean equity funds as profits remain lower than expected, and the volatile Kospi market has created the opportunity for quick returns.

Middle school teacher Lee Ki-young decided early this month to withdraw her investments from an equity fund in which she adds 300,000 won ($250) each month. The 37-year-old first started investing in the fund in 2017, convinced by her bank teller, who said that in the long term, the funds will generate higher returns than installment savings.

But after three years of ups and downs, the aggregate return has only been 2.4 percent.

“My cash was trapped in the funds and suffered losses since I invested when the Kospi index was at its highest," she said.

And Lee isn't alone, as investors are leaving the equity fund market in droves.

A total of 73.1292 trillion won is invested in equity funds, according to the Korea Financial Investment Association Wednesday, which is the lowest level since October 2017. The market has shrunk by nearly half since its peak in August 2008, when total investment reached 144.66 trillion won.

This year alone, 14.58 trillion won has left the market — 97.7 percent of which was withdrawn from equity funds that invest in Korean stocks.

Samsung Asset Management’s stock fund has lost 5.6 trillion won this year, and Mirae Asset Global Investments lost 3.28 trillion won. KB Asset Management lost 1.22 trillion won.

There are three broad reasons why investors may be turning their backs on equity funds.

They may have already reaped profit from the stock market, with the Kospi recently clearing the 2,400 mark. Some investors have made significant gains as stocks plummeted and rebounded due to the coronavirus outbreak. Those who suffered losses in the past may have rapidly withdrawn their investments from the funds when the Kospi rose to 2,400 for the first time in two years.

The lower-than-expected returns may have been another factor. According to FnGuide, the rate of return on those funds during the past three years averaged 2.4 percent. It may have performed better than the Kospi market, which fell 0.5 percent during the same period, but still not enough to satisfy investors.

The return on so-called active funds, which aim for a high rate of return, was negative 1.8 percent over the past three years. Active funds are especially popular among aggressive investors.

“Investors have not enjoyed any meaningful results from their long-term investments, so they have completely pulled out of the fund market,” said an expert in the financial investment sector.

The increase in the so-called ant retail investors that make direct investments in the stock market could also have had an effect. When the Kospi nosedived in March, retail investors bought 25 trillion won worth of stocks in the local stock market. The “ants” had invested after seeing the opportunity to purchase the stocks at a low price.

The buying rally was aggressive, as many ant investors considered it an opportunity to buy low and sell high. Customer deposits, which is cash parked in stock accounts to purchase stocks, went up by 88.8 percent to reach 52 trillion won.

“There has not been an influx of new funds because investors jumped into the stock market expecting high risk and high returns,” said Shin Young Securities analyst Oh Gwang-young.

The market for new fund products is also drying up. Only five new public equity funds have been offered in the market this year — a huge drop compared to last year's total of 34.

“Leakages of fund equity, which happened simultaneously with a series of suspension of repayments from private equity funds, Lime Asset Management and Optimus Asset Management, have led brokerages to stop releasing new equity fund investments,” said a source at a major asset management firm.

Experts say that the stock fund market will continue to suffer in the near future, since it is hard to expect a sharp rise in stock prices due to unfavorable factors like the coronavirus outbreak. There is a low chance for a signature fund item that can flaunt a high rate of return.

“There need to be triggers for money to flow into indirect investment,” said Kim Hoo-jung, an analyst from Yuanta Securities. “There needs to be progressive policy support, such as tax benefits for the publicly offered stock funds.”

Sohn Byung-doo, the standing commissioner of the Financial Services Commission, said the commission will come up with measures to improve the competitive edge of the publicly offered stock funds.

BY HWANG EUI-YOUNG [lee.jeeyoung1@joongang.co.kr]