Brokerages rush to outsourced fund management market

South Korea's brokerage companies are jumping into the outsourced chief investment officer (OCIO) market, outmaneuvering asset management firms, as the OCIO market is estimated to eventually grow tenfold to as much as 1,000 trillion won ($845 billion). 

Despite meager fees, or 3 to 5 basis points of assets under management, brokerage firms are eager to build a track record in the burgeoning OCIO market ahead of the implementation of new corporate pension plans from as early as next year.

Under the plans pending in parliament, companies in South Korea are required to entrust accumulated reserves of retirement allowances to a specialized institution, creating a blue ocean for both fund management and brokerage companies.

Hana Financial Investment Co. is in the hiring process of experienced asset managers both internally and externally to establish an OCIO division.

"We are in our haste to enter the OCIO market, which will grow rapidly," said a Hana Financial official on Dec. 6. The brokerage firm expects the OCIO division to take care of devising investment strategies, managing investments and reviewing their performance.  

OCIO services refer to long-term investment management outsourced by institutional asset owners such as pension funds and state-run agencies. Brokerage companies with a license of discretionary investment management are allowed to jump in. 

Recently, NH Investment & Securities Co. took the financial services market by surprise to become an OCIO manager of South Korea's Construction Guarantee for the first time in the agency's 60-year history.

NH Investment won a 400 billion won ($340 million) mandate from the institution, which provides repayment guarantees for loans on public construction works. Construction Guarantee has up to now managed about 4 trillion won in assets on its own, putting the bulk of them into principal-protected products.

A snapshot of OCIO service providers in South Korea:

Fund type	AUM	Ministry in charge	OCIO Managers
Public pension funds	35 trillion won	Ministry of Economy and Finance	Samsung Asset Management, Mirae Asset Management
Housing fund	40 trillion won	Ministry of Land, Infrastructure and Transportation	Mirae Asset Management, NH Investment & Securities
Industrial accident compensation insurance fund	20 trillion won	Ministry of Employment and Labor	Samsung Asset Management
Employment insurance fund	10 trillion won	Ministry of Employment and Labor	Korea Investment & Securities
A fund for disabled workers and a severance pay fund for bankrupt company employees	200 billion won	Ministry of Employment and Labor	KB Investment & Securities

Since the start of this year, Samsung Securities Co., NH Investment & Securities Co., Mirae Asset Securities Co. and Shinhan Investment Corp. have launched, or bolstered their OCIO divisions.

"Asset managers have held sway over the OCIO market since the OCIO fits into the nature of asset management companies, which make asset allocations with a medium to long-term perspective," said an asset management industry source. 

"As the market is expected to grow substantially, brokerage companies are diving into the market one after another."

Currently, South Korea's OCIO market is valued at about 100 trillion won, compared with 20,000 trillion won for the corresponding market in the US and 10,000 trillion won in Japan, according to NH Investment Managing Director Kwon Soon-ho.

Alongside the OCIO market, the country's growing retirement pension market is another reason behind brokerage companies' advance into the outsourced investment market. 

Although the new corporate retirement plans for all South Korean companies have yet to pass through parliament, small-sized companies with fewer than 30 employees must set up an in-house retirement fund and outsource their management to a third party from next April. 

Brokerage companies' rush into the OCIO market recently ended up in competition between sister companies.

KB Securities and KB Asset Management, both of which belong to KB Financial Group, recently vied for a 200 billion won ($170 million) alternative investment contract for two funds created by the Ministry of Employment and Labor. The brokerage unit eventually secured the mandate, beating the affiliated asset manager.  

Write to Eun-seo Koo at koo@hankyung.com
Yeonhee Kim edited this article.