Mall street shuffle

24 February 2014   Category: News, Asia, Korea   By David Macfarlane

Korea's upcoming online fund supermarket, Fund Online Korea (FOK), is unlikely to have much of an impact on the country's mutual fund distribution landscape in the short term. FOK is slated to be operational by the end of the first quarter.

This fund supermarket will be a web-based distribution platform enabling fund management companies to list their funds thereon and distribute them directly to retail investors for the first time in Korea, Mike Reed, CEO of Fidelity Asset Management (Korea) Limited told Asia Asset Management in its December 2103/January 2104 year-end double issue.

Indeed, some executives at both foreign and domestic asset management companies see this “supermarket” having the potential to be a game-changer longer term. This does not imply smooth sailing and balmy breezes for the new distribution system, however.

Cerulli Associates said in a report on February 24 it expects that distribution will continue to be dominated by local banks and securities firms. Its research shows that nine of Korea's ten largest asset managers have an affiliated bank or brokerage in the list of the ten largest mutual fund distributors.

Such a stranglehold will be difficult for FOK to breach. Like it is in the mutual fund space across Asia, distribution is the key to an asset manager's success in Korea.

"However, with some of the local banks selling as much 70% of their funds from their sister firms, shelf space is severely limited for the 55 asset managers competing in the publicly offered funds space in Korea," says Rachel Poh, an analyst with Cerulli.

To add more bite to FOK in the long run, Cerulli believes that its development should come in tandem with initiatives that rekindle investors' appetite for mutual funds. "Investors in Korea have already shown signs that they are losing faith in mutual funds and have begun to look at investment alternatives," notes Yoon Ng, Asia research director at Cerulli.

But reviving interest in mutual funds will be a challenge too. "This is a difficult task considering the persisting uncertainties in global markets and the impact that this has on the mutual fund space, but it would be better for authorities in Korea to start as soon as possible," adds Ms. Ng. 

Supermarket strategy

Considering the complexities of Korea’s current distribution system, where no independent financial advisors (IFAs) exist, Mr. Reed said: “Without a system of IFAs, leaving inexperienced investors to buy funds for themselves directly, it may well be challenging for those investors making prudent purchase decisions.” At present, Korean financial services regulations do not permit IFAs to operate in the local market. But Mr. Reed believes they would provide a positive element in terms of assisting retail investors to more fully understand the available choices, and the pros and cons of investing in particular types of funds.

One of the most experienced of Asian asset management marketing advisers, Peter Douglas, the CEO of GFIA in Singapore, believes that there is significant potential in a Korean funds supermarket if it is managed in a way that will aggressively promote funds sales. He says: “There isn’t any magic sauce; the success of the Korean funds supermarket will depend on who runs it, who owns it, what the marketing budget is, what the business model is. Funds are sold. So, if the new Korean funds supermarket is allowed to be a proactive sales entity and regulated as such, they’d probably end up giving the current distributors a run for their money.” But, he adds: “If they are forced to go the “cheap and passive” route, they will be a footnote.”

The Korean fund management industry’s professional supervisory body, the Korea Financial Investment Association (KOFIA), is the non-governmental entity that – along with the Korea Financial Services Commission and the Korea Financial Supervisory Service – is spearheading the launch of the new funds supermarket. KOFIA has worked in conjunction with many individual foreign and domestic asset management companies creating this new platform for a proposed 2014 inauguration.

Jong Soo Park, chairman of KOFIA, told Asia Asset Management last year that this would take place on time, within 1Q 2014, adding that indications of intent to participate by asset management companies active in the country’s market have been encouraging. “Forty-one asset management firms had submitted letters of intent to invest in the fund supermarket as of July 23, 2013, and an establishment preparation committee has been formed comprising prominent industry figures. Foundation procedures to establish this fund supermarket are in full swing. Invitations have gone out for applications for the chief executive post,” he said.

While it may not enable the individual participating asset management companies in the Korean market to sell a great many more of their funds to investors in the early stages, with maturity as a distribution platform, the fund supermarket could well make a very substantial and positive contribution to fund sales. As for the bottom lines of the participating fund managers, the knock-on effect is that they would benefit from strongly rising revenues and incomes, a most welcome change for many of them.