Can We Expect Public Offering Funds to Be Popular?

Introducing Performance-Based Compensation System and Lowering Sales Commissions to Boost Profitability

Source: Provided by the Financial Supervisory Service.

[Asia Economy Reporter Park Jihwan] Financial authorities are drawing attention to whether the stagnant market will revive as they promote measures to revitalize public offering funds by introducing a ‘performance fee system’ that pays management fees based on quarterly operational performance. The plan aims to raise the returns, which is the biggest reason public offering funds are being overlooked, by expanding the fee system linked to performance while lowering sales commissions. However, the industry believes it will be difficult to expect market revitalization, citing that the investment landscape has changed to direct investment and that various investment restrictions on public offering funds will not lead to significant changes in returns.

According to financial authorities on the 1st, the Financial Services Commission announced measures to enhance the competitiveness of public offering funds, including △ introduction of performance-linked management fees △ reform of sales commission systems △ activation of online sales. The size of the public offering fund market increased by 38% from 198 trillion won in 2010 to 274 trillion won last year, whereas private equity funds grew by 268% from 120 trillion won to 442 trillion won during the same period.

The biggest reason the public offering fund market has not grown compared to competing products is ‘returns.’ From 2010 to 2019, the average annual return of public offering funds was 2.7%, which is not much different from the 1-year fixed deposit interest rate of 2.5%.

This competitiveness enhancement plan for public offering funds is also focused on returns. By introducing a performance-linked management fee system, it has become possible to design fund products where management fees decrease if the fund’s quarterly returns are low, and increase if returns are good. Performance is calculated at the fund level, not by individual investors.

Although performance fee-type public offering funds existed before, fees were determined based on management performance at the time of redemption, so fees could not fluctuate during the management period. Fee calculation was also done individually per investor, making performance calculation itself difficult. As of the end of last year, only 14 funds had been set up with 22.5 billion won, as asset management companies and sales companies avoided them for these reasons.

The Financial Services Commission is also considering allowing sales companies to receive sales commissions directly from investors. Currently, they receive only a fixed rate from asset management companies. They plan to create a competitive environment that lowers fees by publicly comparing commission rates among sales companies selling the same fund. They also intend to expand the non-face-to-face market with lower sales commissions by increasing channels where asset management companies can directly sell public offering funds online.

However, there is considerable skepticism about the effectiveness of these measures. Since COVID-19, the investment landscape of individual investors has significantly shifted from indirect investments such as funds to direct investments.

Hwang Sewoon, a research fellow at the Korea Capital Market Institute, explained, "Public offering funds include many elements of diversified risk management to protect investors, so there are not many ways to increase returns." A financial investment industry official pointed out, "Considering the reality that public offering funds find it difficult to exceed returns of 2-3%, there is practically no answer to market revitalization through return improvement," adding, "From the investor’s perspective, tax benefits such as tax credits that provide incentives to subscribe even without looking at returns seem necessary."

This content was produced with the assistance of AI translation services.