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2016 Dec/21
The Rapid Growth of Privately Placed Funds and Discretionary Investments (PFDIs) and its Effects in Korea Equity Funds Market
Research Papers 16-07
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- Research Topic Asset Management/Pension
Kim, Jongmin
- Summary
- The growth of the domestic asset management industry has been mainly led by privately placed funds and discretionary investments (PF&DIs) since the global financial crisis. In this regard, this report studies key changes or issues in the recent domestic equity funds market and discusses its potential effects and implications. More specifically, this report sheds light on the following issues and presents some empirical results based on the asset management company level monthly dataset from Dec 2011 to March 2016.
First, this report compares various key features such as the flow of funds, management fee, and performance between publicly offered funds and PF&DIs which invest in domestic equities. PF&DIs have dominated publicly offered funds in terms of the growth rate of the flow of funds and its size as well. Also, the risk-adjusted performance of PF&DIs is better than that of publicly offered funds while there is no significant difference in the rate of return between publicly offered funds and PF&DIs. The level of management fee of PF&DIs, however, is much lower than that of publicly offered funds.
Second, this report analyzes the determinants of the flow of funds in each sub-market. The flow of funds is more sensitive to the past performance and the management fee in publicly offered funds market than in PF&DIs market. More importantly, both the magnitude and the statistical significance of estimated sensitivities are different in both sub-markets depending on whether the past performance is good or bad. In this respect, the flow-performance relationship is asymmetric in domestic equity funds market. Nonetheless, we have found some empirical results that institutional investors tend to withdraw some portion of their investments in response to the poor performance. This implies that investors’ discipline of the fund manager is working to some extent in PF&DIs market, which could help enhance the overall investment efficiency and establish investors’ trust on the asset management industry.
Third, this report explores the side-by-side management effect based on the theoretical and empirical analysis for the domestic equity funds market. Its effect could arise when interests are misaligned between investors of the publicly offered funds and the asset management company as PF&DIs becomes more important in terms of profitability. Despite the rapid growth of PF&PIs, no side-by-side management effect is found in the empirical analysis. Rather, we have found a positive spillover effect in that the return of publicly offered funds gets better as that of PF&DIs increases. However, it is important to note that side-by-side management effect is likely to emerge if the current growth trend of PF&DIs continues going forward. Hence, more policy efforts are required in order to strength the demand base and improve informational transparency for the publicly offered funds market.