Franklin Templeton Investment Services, of San Mateo, Calif., recently launched a $270 million Korean fixed income high-yield debt fund that will be wholly funded by the Korean Development Bank in Seoul, and will be closed for three years. If the fund is successful, Franklin Templeton said it will offer similar products to clients in the future.
The new fund will invest in equities and bonds, but the bulk will be high-yield debt. The firm will charge a management fee of 30 basis points and the product will be distributed by Good Morning Securities.
The secondary market is almost nonexistent in South Korea, causing the Korean Development Bank to take on more and more debt, including most of Koreas corporate debt. An increase in domestic bankruptcies has buried the banks bottom line. At one time, high interest rates were producing returns of around 17% on some fixed income products. Now, due to the weakening economy and recent tragedies, the interest rate has been slashed in Korea to a historical low of 4.67%.
Institutional investors, however, will be on the prowl for higher asset returns in a market where liabilities over the long run are 7.5%, but no investments with returns above 7% in Korea.