Korea: new products launched

The total net assets of investment funds amounted to USD136.4 billion as of the end of June 2003, a decrease of 7.0% (USD10.3 billion) over the end of June 2002. During the same one-year period, the KOSPI* dropped by 9.9%.
Investment trusts, which had seen their assets on an upward trend from last year, ran into difficulties in March 2003 owing to the SK Global accounting fraud and concerns about liquidity at credit card companies.
Investors, who had suffered from the Daewoo crisis in 1999 - when they made large-scale redemptions owing to losses from the Daewoo Group's non-performing bonds and commercial papers, requested the redemption of their holdings. This resulted in huge outflows of USD 27.2 billion during March and April.
However, investment trust management companies launched new products such as Treasury MMFs (money market funds) and ELS (equity-linked securities) Funds in order to attract investors. Treasury MMFs invest in the safest bonds, treasury bonds; while ELS funds are linked with the KOSPI. As a result of these efforts, the industry was able to make a partial recovery.
As of June 2003, the total net assets of hybrid funds and MMFs had declined by 28.3% and 16.2% respectively over June 2002, while those of equity funds had risen by 6.4%. Meanwhile, the net assets of bond funds were relatively stable with a decline of only 1%.
Contractual-type investment funds accounted for 94.5% of total assets as of the end of June 2003, while corporate-type funds accounted for only 5.5%, although this was an increase of 22.1% from a year ago.
Percentage of Securities Holdings to Market Capitalisation
(i) Stock holdings of investment funds as a percentage of the total market capitalisation of listed stocks increased to 6.5% as of the end of June 2003 from 6.4% a year ago.
(ii) Bond holdings of investment funds as a percentage of the total market capitalisation of listed bonds decreased to 13.7% as of the end of June 2003 from 16.5% a year ago.
Number of management companies registered in Korea The total number of fund management companies recorded 45 as of the end of June 2003. Among these, 12 are foreign companies based in Korea, whose assets amounted for 24.2% of total assets.
TRENDS CONCERNING INTERNATIONAL INVESTMENT FUNDS
(a) Onshore unit trusts exclusively for foreigners (Onshore funds): During the one-year period ended June 30, 2003, the net assets of onshore funds increased by 36.5% (USD455.9 million) to record USD1,815.8 million. This increase was due to a rise in assets in hybrid funds of 129.5% (equity funds decreased by 8.0%) compared with June 2002, which indicates that foreigners were adopting a cautious approach to the Korean market. As market conditions improve, it is expected that the hybrid funds might be converted to equity funds.
(b) Overseas Investment Trust Funds (OITFs): The net assets of OITFs, which continued to see an upward trend since 2000, rose by 28.6% in the year to June 2003 to reach USD1,980.7 million. This was mainly caused by an increase in assets of equity funds, which recorded a gain of almost ten times in the year while those of bonds funds rose by only 8.0%.
ONSHORE FUNDS OITFs
LEGAL AND REGULATORY DEVELOPMENTS: A new act, the Indirect Investment Asset Management Business Act (IAMBA), is scheduled to come into effect at the end of this year. The objectives of the new act are to introduce regulation of institutions by function, induce competition and innovation through improved regulation; and regain the trust and confidence of investors through enhanced investor protection programs.
The new act will replace the Securities Investment Trust Business Act (SITBA) and Securities Investment Companies Act (SICA) while also covering bank trust accounts, variable insurance accounts, and investment advisory & discretionary management services. The most significant changes in the new act are the expansion of investment objects and distribution channels and the application of this one act to the same activities.
The investment objectives will expand to include real estate, commodities, and OTC derivatives as well as securities. Also, sales by insurance companies and direct sales by investment trust management companies (within two years) will be allowed.
NEW PRODUCTS: Exchange traded funds (ETFs) and funds of funds (FOFs) have been introduced from September 2002 and ELS (equity linked securities) Funds from March 2003. ETFs amounted to USD484.8 million as of the end of June 2003 with five funds operated by four management companies. Meanwhile, the assets of ELS funds reached USD 1,616.5 million in 129 funds managed by 15 companies
CROSS-BORDER DISTRIBUTION: Assets of cross-border funds, which are set up outside Korea by foreign fund management companies and registered with the Financial Supervisory Service (FSS) for sale in Korea, decreased by 8.8% to USD165.5 million. After a rapid increase in 2000, assets have been decreasing.
OTHER COMMENTS AND OUTLOOK: Investment trust assets, which had been on an upward trend since the beginning of 2003 to reach USD152.8 billion in early March, decreased to USD 136.4 billion as of June 2003 sparked by the accounting scandal at SK Global and liquidity problems at local credit-card companies stemming from rising delinquencies on card payments. However, with the newly established and introduced Treasury MMFs and ELS Funds, the investment industry has overcome these difficulties.

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Sales volume by type of distributor

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                                                                    (in USD Billion)

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Type                End of 2000     End of 2001     End of 2002     End of June 2003

Securities Firms    90.9 (92.8%)    92.6 (89.0%)   110.08 (86.3%)      113.5 (83.2%)

Banks                 7.0 (7.2%)    11.4 (11.0%)     17.6 )13.7%)       22.9 (16.8%)

Total              98.0 (100.0%)  104.0 (100.0%)   128.4 (100.0%)     136.4 (100.0%)

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