Yeouido, Seoul's financial district (Yonhap)
South Korea’s securities and asset management firms are racing to capture a bigger piece of the Outsourced Chief Investment Officer market as they expect that more firms and institutional funds will entrust the management of their cash reserves to them.
“Institutional investors and private companies used to manage their own investment through an in-house finance team, but once they see an increased amount of cash hoarding, they tend to outsource because it requires complex and professional skills,” said a strategy and planning official at a large securities firm who declined to be named.
In the most recent competition over an OCIO job, major securities firms, including Mirae Asset Securities, NH Investment & Securities, KB Securities and Shinhan Securities, all vied for managing the assets of employment insurance funds, a fund set aside by the government every year to provide financial resources such as unemployment benefits.
Mirae Asset Securities, which was selected as the winner last week, will make investment decisions for 6.6 trillion won ($4.98 billion) in funds belonging to employment insurance funds until 2027.
The brokerage firm is expected to earn some 4.1 billion won a year from the project, given that the rate of the management fee is equivalent to 0.0615 percent of the size of the employment insurance funds’ assets under management. The amount is not significant compared with its sales last year, which stood at 19 trillion won.
Still, major financial firms are eager to have the upper hand in the market because they believe the market's value will grow substantially, especially when adopting an OCIO becomes commonplace among private companies.
“In a situation where growth in the capital market is slowing due to tightened global financial conditions and shrinking asset management fees, this is a new opportunity for discretionary investment companies capable of OCIO business, such as securities companies and asset management companies,” said Kim Hye-won, a senior researcher at Woori Finance Research Institute.
The size of the domestic OCIO market stands at about 132.2 trillion won, and is expected to grow to about 1,000 trillion won in 10 years thanks to the increase in demand from private companies.
As cash reserves of private companies steadily increase, 8 trillion won in private firms' assets are being operated through an OCIO.
“To become an OCIO for institutional funds, you need to meet several qualifications which require high initial costs, including a sufficient number of workers,” Mirae Asset Global Investments official Han Jin-kyung said. “Despite the cost, we see that developing a track record now will be important to win more deals in the future.”
Last year’s law rectification is also providing headwind for market growth.
Under the Act on the Guarantee of Employees’ Retirement Benefits, which was revised in April last year, a company and its workers are required to establish an independent trust corporation through agreement and select an external financial company to manage retirement pension assets, which will expand demand for OCIO services.
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