European diet sours Mirae Asset’s Korean breakout

Appointed in April 2012 as CEO of Korean fund house Mirae Asset’s operation in Hong Kong, also overseeing Singapore, Taiwan, Europe and the Middle East, Jung Ho Rhee is facing an uphill struggle to sell the Asian investment story during regular trips to London.

The Mirae brand is an established one, particularly in Korea. The vast majority of the $58.8bn (€43bn) in assets managed by the parent company are in the home market. But Mr Rhee’s task is to boost the $4.3bn currently invested by clients of Asian and European distributors in Mirae funds.

Hong Kong is his distribution headquarters for mutual funds, with the European-domiciled cross-border Ucits funds the structure preferred by most investors.

He commands a 13-strong team of portfolio managers and analysts to manage Asian equities, complementing investment teams in Korea, Taiwan and India, plus a Chinese research office in Shanghai. Teams in another long-term favourite market, Brazil, benefiting from the “commodities super-cycle” are now managed out of New York.

These research teams are at the cutting edge of their profession, believes Mr Rhee. There is no shortage of banks and other distributors trooping up to Mirae’s London offices, nestled behind the fashionable Royal Exchange building in the heart of the Square Mile. But their interest in Eastern investments remains unpredictable.

“We are seeing a different kind of momentum and more of a single country appetite,” reveals Mr Rhee, with the idea of emerging markets allocations as a whole now contrary to most institutions’ investing mindset. Even though banks are still happy to discuss long-term development of South-East Asia, they are reluctant to place any assets there.

“Asia is still there, but there is not much interest in emerging markets as a whole. Even clients in Asia like to see a specific, single-country story,” comments Mr Rhee.

He is convinced that most of the European banks he is introduced to are looking for specialist, “home-grown” Asian-based rather than global managers. This is one of the reasons Mirae is trying to diversify from its Seoul-centred core market.

“Even though the Korean market has tremendous potential and strong allocations from the region, it remains a small basket,” he says. “So we are seeking other investment opportunities in China, broader Asia and emerging markets as a whole.”

Clients’ main concern – be they in Asia or Europe – is currently volatility and smoothness of returns. While more distributors are prepared to look at funds investing their customers’ money in northern countries such as Korea and China, they really need more specific opportunities – picking technology, healthcare and consumer brands – to feed their hunger.

Markets and sectors, including those in China, have shown tremendously divergent performance during the last few years. “Performance disparity is high,” he concedes.

This trend, claims Mr Rhee, plays to the main fund he is trying to promote to distributors – the highly concentrated, bottom-up research-fuelled Sector Leaders strategy. Up to 70 per cent of the group’s international equity assets currently reside in this strategy.

Mirae’s second flagship product is the Great Consumer Strategy, which buys into the Asian consumer story as a whole, with much stronger exposure to South-East Asia and India, in addition to China and the rest of the continent’s Northern region. Global equities strategies concentrate on brands such as Hermes.

“We know Asia and emerging markets well, so we pick some global names with exposure to Asian business,” reflects Mr Rhee. The next trend among distributors and private banks in particular, will be a search for higher yielding Asian equities, he believes.

So far Mirae has capitalised on these trends and signed distribution agreements with “40 partners” across Asia and Europe, in addition to a more extensive line-up in its domestic Korean market. European institutions have been a particular target because of the penetration they provide.

“Swiss banks have offices in Singapore and Hong Kong, so one bank effectively offers us three distributors,” smiles Mr Rhee. “Local names in Singapore and Hong Kong have a more limited catchment, so we focus mainly on global distributors,” which account for 80 per cent of his business.

He sees a wide open distribution market, with few rivals interfering in his pitch.
“I don’t see any fierce competition from
Asian home-grown houses to manage and distribute Asian products,” he ventures, stressing Mirae’s understanding of “the dynamics of the culture” in Asia.

“If you look at Luxembourg Ucits managed by Asian managers, apart from Nikko, there is not much competition to speak of. China AMC have launched Ucits, but focusing on their home country. Having a region-wide product is all based on having a good research capability.”

A key disadvantage of global houses is the lack of language capabilities of their research staff, believes Mr Rhee. “In North East Asia, 95 per cent of local literature and material is produced in the local language,” he says, with a local presence absolutely vital in Taiwan, Japan and Korea, where financial communication is almost exclusively conducted in the domestic tongue.

“We tell our clients that in order to fully understand Asia, fund managers must be able to speak in Mandarin and Japanese,” he says. “Western investors typically have a limited understanding of what has been happening in these economies.”

But overall, the conviction among investors that Asia will succeed against other markets has not disappeared. “There is a belief out there about Asia, even though developing markets have done better during the last three years,” says Mr Rhee.

“The main appetite this year in wealth management has been for European equity. But when you talk to banks about Asian growth, they are still confident about that.”

While this year appetite has been rising in the more selective single country space, this will soon change as inter-country trade across the continent increases at the expense of the US and Asia. Mr Rhee estimates that more than 70 per cent of South East Asia’s trade is now with other Asian economies.

“In the near future, we are talking about a more synchronised story, as Asian countries become more in-step than ever in terms of trade.”   

ETFs provide both threat and opportunity

Following its purchase of Canadian ETFs provider Horizon in 2011, Mirae currently have 10 exchange traded funds listed in Hong Kong, and 50 in Korea, which Mr Rhee says offer instant accessibility to self-directed investors. “ETFs offer a very good window for customers to invest directly themselves,” he says. “Institutions are also becoming more sensitive to fee scales, so the low cost makes sense for many.”

However, there is an admission that due to these very qualities, traditional, active investments in Asia are increasingly under threat from cheap, easy-to-access passive vehicles, particularly in long-term pensions.

He even admits to a dilemma for active managers, reliant on a higher fee-based model, who are now also promoting ETFs to distribution clients.

“We are right to think that ETFs are a big threat to active management for clients seeking low cost and accessibility,” says Mr Rhee. “But active management is based on outstanding research capability and long-term returns, which is quite different from the passive model. Ours is a high conviction, bottom-up, research-driven process.”

One particular beauty of active management is the ability to launch pan-regional products, which can be harder to replicate passively. “The 10-year performance of ETFs is not that good when it comes to multi-country passive products, as it is relatively difficult to provide benchmark returns,” says Mr Rhee. “Many distributors and investors are seeking multi-country regional products and we strongly recommend an active approach to them.”