With geopolitical tensions between communist North Korea and emerging South Korea now searing, the once trendy practice of turning to emerging-market Korean funds is long gone.
Only two funds dominate this niche sector, the Matthews Korea and the Fidelity Advisor Korea funds, and even they are turning in disappointing performance.
Barely in the consciousness of the average American, and with everyone focusing on Iraq, the nuclear standoff on the Korean peninsula has helped to deteriorate the Korean economy and the performance and popularity of funds investing in the country.
"Fear is a stronger driver than greed or optimism," said Don Cassidy, senior research analyst with Lipper of Denver. "When things get scary, people pull back."
The Korean Investment Fund, a product from Alliance Capital of New York, is preparing to liquidate assets, pending shareholder approval. Rationale for the dissolution is the fact that the fund, which invests in companies such as Samsung Electronics, and Hyundai Motor Co., has less than $20 million in assets and has been in continuous net redemption since its open-ending in late 2001, an SEC filing shows. Alliance did not return calls seeking comment.
Still, the fund has not performed miserably, as one might suspect for a fund that is about to be nixed. In 2002, it actually was in positive territory, up 5%, well ahead of the Korean Composite Stock Price Index at year-end. Additionally, since its inception in 1992, it has closely tracked the index, and has stayed in front of it since 1999. However, if an investor put $10,000 in the fund at the end of 1992, he or she would have $8,410 as of the end of last year.
Nuclear Crisis Takes its Toll'
"The ongoing nuclear-related crisis is starting to take its toll on foreign investors," said Bill Rocco, senior analyst at Morningstar. "The Matthews Korea fund is down like 19% year to date, which is worse than a lot of other markets in Asia," he added.
The Matthews Korea fund, which is part of the Matthews Asian fund family and one of the better-known Korean funds, is off 31.3% in the last year and down an average of 5.4% in the last three years. However, it is 13.5% ahead over the past five years.
Another major player, the Fidelity Advisor Korea fund, is off 19% so far this year and 32.8% in the last year. This fund is 95.1% weighted with Korean stocks. A Fidelity spokeswoman said that while it is true that the fund is off nearly 40% from its November 1994 inception, through the end of February, it has beaten its benchmark, the Korean Composite Stock Price Index (KOSPI), "handily." The KOSPI was down more than 62% over the same period of time. Additionally, she said the fund has beaten two-thirds of its peers since inception and 93% of its Lipper peers in the last five years.
"The American investor is still working off the aftermath of the bust of our bull market and the international crisis," said Gary Gensler, former undersecretary of the U.S. Treasury and author of the book The Great Mutual Fund Trap. "The big fad of investing in emerging markets was rudely interrupted by the Asian debt crisis. Add to that a three-year bear market. We're still in the hangover period."
Foreign companies often face such risks as political tensions, military conflict and economic developments, or lack thereof. While these same factors do affect U.S.-based companies, the risks and potential for the situation to completely blow up is much greater elsewhere in the world, especially in emerging markets, according to the experts.
Additionally, securities of foreign companies and their markets may be less liquid and more volatile than U.S.-anchored companies. The securities markets of many Asian countries are relatively small and the trading volume is concentrated on a relatively small number of industries. These markets, therefore, are more susceptible to different factors than in the U.S., such as large investors trading big blocks of securities.
"With Korean funds, there's not a tremendous demand, and Fidelity and Matthews have the market pretty much locked up," Rocco said. "There's a tremendous amount of risk in emerging market funds," he continued, adding that one way to get around investing in an entirely Korean fund yet still get exposure to that market is through a broad-based foreign fund.
However, Gensler sees the whole Korean situation as extremely scary. "It could be the Enron of international investing. The whole thing could just blow up," he said.
Besides the political risks, another major drawback of foreign funds is high expense ratios, said Gensler, who said the average expense ratio for 55 Asian emerging-market funds at 2.15%, compared with a 1.3% to 1.4% ratio for the average diversified U.S. fund.
"We Americans tend to be less informed about the rest of the world," Cassidy said. "One-half of the world's stock market is outside the U.S., yet only 15% of U.S. equity assets are invested in funds outside the country." Part of the reason a lot of these funds are not bigger is due to the lack of information to U.S. investors, due in part to delays in the flow of information.
"You just don't know what you're missing," Cassidy said
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