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Korean Investors' Attention is Drawn to Investments in Offshore Securities
Jae-Hyeong Joo, Hwi-Chul Jin
PricewaterhouseCoopers, Seou
March 2006

In the Korean investment management market, the proportion of funds investing in offshore securities to the market size has grown, up from 2.2% to 4.8% and to 5.6% at the end of 2002, 2003 and 2005 respectively.

Two Types of Funds Investing in Offshore Securities

Collective investments of Korean investors in offshore securities largely consist of two types of funds: overseas investment funds and offshore funds. Overseas investment funds refer to funds established, managed and promoted in Korea by local asset management companies to invest in foreign securities in accordance with Korean relevant laws and regulations. Conversely, offshore funds are established in foreign countries by foreign management companies under their own investment policies. Some of them are distributed to Korean investors through Korean sales agents.

Overseas Investment Funds

The recent statistics indicate that total NAV of overseas investment funds in Korea has dramatically increased, amounting to approximately US$2.9 billion, US$4.2 billion and US$6.6 billion as of the end of March 2003, 2004 and 2005, respectively.

Prior to the Indirect Investment Asset Management Act of Korea ("AMBA"), which became effective from the beginning of 2004, overseas investment funds were limited to those funds which were directly invested in offshore securities. With the new concept of funds of funds introduced in ABMA, overseas investment funds expanded their investment objectives to offshore funds managed by foreign asset management companies. This fund-of-funds investing in offshore funds has played significant roles in the overseas investment funds with notable statistics indicated by their NAV changes from US$0.7 billion in July 2004 to US$2.71 billion in March 2005.

Subsidiaries of foreign asset management companies in Korea manage their overseas investment funds - with advisory services regarding direct investment funds with fund-of-funds investing in offshore securities and funds - from its foreign affiliates. To compete against these foreign groups, local asset management companies have also been developing their own capabilities for foreign investments through strategic alliances with foreign investments groups.

Offshore Funds

As recent statistics show, total NAVs of offshore funds distributed in Korea have been increased significantly, amounting to approximately US$0.9 billion, US$2.8 billion and US$3.9 billion as of the end of December 2002, 2003 and 2004, respectively.

250 funds (constituting NAV of US$4.7 billion in total) managed by 11 foreign asset management companies worldwide have been distributed in Korea through 20 local sales agents as of July 2005.

The details of offshore funds by the top five foreign asset management companies in Korea as of the end of July 2005 are as follows:

Source: Asset Management Association of Korea

These offshore funds are being distributed to Korean investors through local sales agents after the FSC accepts the sales application (AMBA stipulates eligibility standards of foreign funds for sale).

Since the first half of 2004, these offshore funds have steadily been replaced with fund-of-funds type of overseas investment funds, satisfying investors' needs for investments in offshore securities. This trend led to relatively slower growth rate of investing in offshore funds.

Replaceable Products

Owing to the government policy of fostering the investment management industry, the popularity of regular saving funds and the expansion of distribution channel, the size of fund market has been growing steadily. Comparing to total AUM of U$145.0 billion at the end of 2003, the size has grown 28.9% to US$187.0 billion at the end of 2004. While the market size will continue to grow, it is uncertain how the growing market pie will be shared by overseas investments funds (direct investment type and fund-of-fund type) and offshore funds, and by Korean and foreign asset management companies. It is worthwhile, therefore, to pay attention to a significant feature: that all these types of funds are interchangeable with one another.

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