Sales of target-return funds, which drew strong demand during the stock market rally in the first half of this year, are losing steam. Assets in these funds have shrunk by nearly 60% from the start of the year, and analysts say the slowdown will weigh on brokerages' wealth management earnings.
Assets in target-return funds stood at 1.356 trillion won ($950 million) as of the previous day, according to financial data provider FnGuide on the 14th. That is down 1.9451 trillion won, or 58.9%, from 3.3011 trillion won on Jan. 2. The decline was concentrated in the first half. Assets fell to 1.3133 trillion won on July 1 from 2.0303 trillion won on April 1, and have since held in the 1.3 trillion to 1.4 trillion won range. The number of funds in operation was little changed at 107, compared with 106 at the start of the year.
Target-return funds shift their holdings from assets such as stocks into assets such as bonds once a preset return target is reached. A series of such products launched in the first half, when the stock market rose sharply, as investors sought to capture the rally. Sales have since slowed as the market turned weaker. Still, the figures also reflect redemptions after targets were met as well as early withdrawals, making it difficult to attribute the entire decline since the start of the year to weaker sales.
The slowdown is expected to pressure brokerages' wealth management results. Hana Securities estimated that Korea Investment & Securities posted 83.2 billion won in wealth management fee income in the third quarter, down 61.4% from the previous quarter. "Wealth management fee income will be affected by factors including lower sales of target-return funds," said Ko Yeon-soo, an analyst at Hana Securities. "Trading volumes fell 31% from the previous quarter for overseas equities as well as domestic equities, so we expect a sharp drop in the brokerage business."
Sales may also slow for wrap accounts that use target-return strategies. Daol Investment & Securities projected that NH Investment & Securities' wealth management revenue fell 31.0% from the previous quarter in the third quarter. "Wealth management revenue is expected to decline because of lower average daily trading value in both domestic and overseas markets," said Kim Ji-won, an analyst at Daol Investment & Securities. "Unlike the previous quarter, sales of target-return wrap accounts may also fall."