Vanguard’s index switch may have short-term impact on Korea
05 Oct 2012
Vanguard Group's decision to switch its index benchmarks for six equity funds is not expected to impact Asian markets, although the change of categorisation for Korea may have a short term effect, as portfolios are rebalanced. The move from MSCI to FTSE's Emerging Index alters South Korea from an emerging market to a developed market for the Vanguard Emerging Market Stock Index Fund, the Valley Forge. The $67 billion fund is expected to shed South Korean stocks over the next 6 months.
"The Vanguard shock is expected to be mitigated because they said they will sell South Korea's portion of 15.6% over 25 weeks, meaning 4% weekly, through system trading," said Lee Young Joon, a quant analyst at Hyundai Securities, one of the top 5 South Korean brokerage houses. "Such a factor is not significant enough for active investors to aggressively react on, and so I don't expect massive outflow from the South Korean market," he added.
"In fact, the Vanguard move can offer new opportunities to the South Korean market, because the pie is bigger as a ‘developed' class. If active and long-term investors enter with bigger investment, it will help South Korean market to reduce volatility and improve its valuation," Lee said.
Lee expects that MSCI will now come under the pressure from global investors to change South Korea's category to the advanced. "The South Korean government has gained justification not to comply to the dictates of MSCI in order to join the developed class."
The move to FTSE has also aroused concerns that the decision could trigger fund managers to sell South Korean stocks. "Given that the Vanguard Group's asset size for Korean sector amounts to about 10 trillion won, there is some validity to the concern but we are not worried over the Vanguard's move. There are too many other important factors influencing the fundamentals of South Korean market," said Kim Ho Jin, an executive director at Mirae Asset Global Investments, the largest South Korean asset management firm controlling over $52.2 billion of which $ 47.1 billion is invested through its South Korean headquarters.
Vanguard's decision, apparently driven by their desire for lower fees from its index providers, cannot impact the core value of South Korean stocks, says Yoon Chang Bo, CIO of GS Asset. "Vanguard is not an active player. Their decision is not driven by change in the evaluation of South Korean stock market but by a lower fee. There may be some impact of the outflow during the rebalancing period, but it will be limited to that timeframe and won't change the fundamental flow of the South Korean market," he said.
Vanguard is the largest U.S. mutual fund provider and this move is likely to trigger a wave of fee-based consolidations among the industry's giants.
Author: Stella Kim