Fund managers have backed the Korean government’s move to incentivise companies to boost dividends.
Historically, Korea has had one of the lowest dividend payout ratios. The reform, which needs to be passed by the Korean parliament in autumn, offers tax incentives for companies to increase dividends or wages.
The legislation will also lower dividend income tax and subject new retained earnings to a special tax if they are not used within three years.
James de Bunsen, multi-asset fund manager at Henderson Global Investors, said this tax reform would be a “game changer” for Korean equities.
“The government wants to shake up the corporate sector and this is giving a strong tailwind for Korean equities and if that happens then markets should re-rate,” he said.
Mr de Bunsen bought a future on the Kospi – an index of all common shares on the Korean Stock Exchanges – to gain exposure to Korea. At the same time, the manager reduced his equity exposure to Europe.
“We are using futures because it’s a tactical trade,” he said. “We didn’t have a Korean fund to hand and we wanted to implement the trade quickly.”
He added from 2 per cent to 4 per cent to the £393.7m Henderson Multi-Manager Income & Growth, the £418.85m Henderson Multi-Manager Managed and the £244.46m Henderson Multi-Manager Active funds.
But Jake Robbins, manager of the £76.9m Premier Global Alpha Growth fund, said the dividend reform would not be enough to spur him to buy stocks.
However, when combined with further government legislation from Korea and other Asian countries putting similar reforms in place, he said he had a positive outlook for the country.
“At the moment we don’t have anything in Korea, but I wouldn’t be surprised if we bought something soon,” he said.
Omar Negyal, co-manager of the £151.2m JPMorgan Emerging Markets Income fund, said he was considering his response to the reform.
Mr Negyal has had a longstanding underweight to Korea with just 6.5 per cent exposure at the end of last month, some 9 per cent underweight compared to his benchmark MSCI Emerging Markets index.
He increased his holdings slightly this month though, after adding a new stock to his portfolio and said he was looking to identify companies that would raise dividends.
But the manager said he did not expect to drastically increase his position unless “there was a huge change in corporate mentality”.
“We would rather invest in companies that have a true desire to pay dividends, since the management of those companies will be of a higher quality of thinking in terms of balancing capital and growth,” he said.
Elsewhere, the Bank of Korea cut its interest rate for the first time in 15 months on August 14.
The 0.25 per cent cut, which takes the rate to 2.25 per cent, will bring it to its lowest level since November 2010, according to the Bank of Korea.
The rate cut has not had a huge impact on the market as it was already priced in, according to Mr de Bunsen.
However, Stephen Cohen, chief investment strategist for BlackRock international fixed income and iShares EMEA, said: “The Bank’s easing stance, combined with the government’s expansionary policy, have helped stall the Korean won’s strengthening trend and have boosted momentum, reflected in the pickup in equity exchange-traded product (ETP) inflows.”
Equity ETP inflows into Korea surged to nearly $1.1bn (£660m) on August 5, up from $212m on July 26.
Mr Cohen said the reforms were “significant” and added he expected this trend to continue.
Steering clear of chaebol’s ‘spaghetti structure’
Fund managers who have invested in Korea have tried to avoid companies that are wrapped up in the “spaghetti structure” of chaebol.
One of the reasons Korea has a low dividend ratio is because of the corporate structure known as chaebol. This is where a large company or several groups of companies are owned, controlled or managed by the same family dynasty.
For example, Samsung, Hyundai and LG Group are all owned by the Lee family.
Omar Negyal (pictured), co-manager of the £151.2m JPMorgan Emerging Markets Income fund, explained: “The Korean corporate market almost looks like a spaghetti structure of crossholdings. So these companies don’t have an incentive to pay dividends because they don’t benefit from paying them.”
However, he has held four Korean stocks in his portfolio that have an average dividend payout of roughly 12 per cent of their net income. These are Kangwon Land, KT&G, S-Oil and SK Telecom. The country averages a dividend yield of 50 per cent.
In general, he said he preferred Taiwanese stocks, which represent his largest overweight in his portfolio at 17.2 per cent – 5 per cent overweight his MSCI Emerging Markets index benchmark.
Key Korean numbers
$1.1bn (£660m) – The amount of money in Korean equity exchange-traded products on August 5 – up from $212m on July 26
50% – Average dividend yield of Korean companies
13.1% – Consensus earnings growth for 2014 – stronger than the 10.2 per cent for emerging Asia and 7.4 per cent for emerging markets
$4bn – The net amount of Korean shares bought by foreign investors in July – four times the amount bought in June
