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Web-only Exclusives
November 30, 2000

From Our Correspondent: Hirohito and the War
A conversation with biographer Herbert Bix

From Our Correspondent: A Rough Road Ahead
Bad news for the Philippines - and some others

From Our Correspondent: Making Enemies
Indonesia needs friends. So why is it picking fights?

Asiaweek Time Asia Now Asiaweek story

DREAMS AND CONTROVERSY

A $5-billion Korean fund aims to rival Fidelity

By Assif Shameen


AT THE HEIGHT OF the Asian Crisis, the main talk among Korean housewives was the government's appeal for them to donate their gold jewelry. In all, more than $2-billion worth of the precious metal was collected to bolster the country's depleted foreign-exchange reserves. Now that the national current account is in surplus, the ladies discuss the stock market and mutual funds - specifically, the 15 funds bearing the Buy Korea name. Started only in March, the new investment vehicles have collectively raised a phenomenal $5.2 billion, prompting their manager, Hyundai Securities, to spin dreams about Buy Korea becoming the world's largest retail fund family in five years. Take that, Fidelity Magellan Fund (net assets: $91.4 billion).

"The enthusiasm has been beyond our expectations," says Lee Ik Chi, chairman of Hyundai Securities. "In Korea, housewives have big savings at their disposal and we are trying to tap these to speed up economic recovery." Buy Korea's main pitch: save the country by investing with us - and make money in the process. The Buy Korea Napoleon Equity Unit Trust, which invests up to 90% of its assets in stocks, is up 24% in the past 10 weeks. The Buy Korea Renaissance Equity Unit Trust, which limits exposure to equities at 50% of its assets, gained 13.9%. But the stock market index soared 30% in the same period. Why are these major products lagging the benchmark? "We are adopting a more cautious approach and going only for quality stocks that will add value over the long term," says fund manager Park Jae Man, who once worked for the Korea Asia Fund in Hong Kong.

Critics cite another reason. They allege that some Buy Korea funds are underperforming because they are being used to prop up the share prices of Hyundai companies. Hyundai is one of two chaebol - the other is Daewoo - tottering under a massive debt load. To recapitalize, Hyundai companies are making cash calls through rights issues. "What worries people is that there is very little transparency," says Bill Hunsaker of ING Barings in Seoul. "Nobody knows what they are buying or selling." Last month, the government launched an investigation to find out whether Buy Korea violated laws when it purchased related securities and allowed cash-strapped Hyundai companies to use some of its cash. Says Kang Byong Ho, deputy governor of the Financial Supervisory Service: "We are watching Buy Korea but we have found no violations so far."

The government is being careful because more than two-thirds of Buy Korea investors are first time mutual-fund buyers. Nearly half have never directly participated in the stock market. Seven of ten are women, most of them homemakers in charge of investing household savings. The rest are typically unemployed men looking for juicy profits from their severance payments. In the past, the cash - the average account has about 20 million won or $17,200 - would have gone to high-yield deposits with investment trust companies and merchant banks, which used the money to lend to businesses. "In the last two years many investment trusts, merchant banks, insurance companies, even banks collapsed," says Lee. "Korean housewives had their confidence in the system shaken."

The chairman says Buy Korea is not misleading anyone by wrapping itself in the flag. "We're trying to give investors good returns and that has nothing to do with nationalism," he says. "We want to ensure that their money is safe." Each one of the 15 funds on offer is designed to suit the investor's appetite for risk. The most popular funds are those that allocate no more than 50% of their total holdings to equities. Just a third of the $5.2 billion so far collected went to predominantly equities funds. Buy Korea investors pay no initial fees and sales charges, only annual management fees equal to 2.95% of the fund's net asset value. Says Lee: "In America or Hong Kong, retail investors can pay up to 5% or 7% in service charges plus management fees."

What about allegations of improper use of Buy Korea's money? "There are other large chaebol in Korea that are jealous of our success in creating these funds," says Lee. "We invest in Hyundai companies because some of them are blue chips." The chairman says Hyundai shares will never comprise more than 10% of any equities portfolio. Currently, the top five companies that account for a third of stock holdings, he says, are non-Hyundai blue chips SK Telecom, power utility KEPCO, Samsung Electronics, Samsung Fire and Marine Insurance, and steel giant POSCO.

"It's impossible that we are propping up Hyundai companies," insists Lee. "If we do that, we'd lose the trust of investors and the funds will have to shut down." And trust is something Buy Korea cannot do without if it wants to rival Fidelity and other international mutual fund companies. Lee wants global investors to join Korean housewives in nurturing Korea's economy through the planned Buy Korea Fund International, which may soon list in New York. Watch that $5.2 billion grow.

- With reporting by Laxmi Nakarmi/Seoul


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