A Sleepless Night Even for Fund Managers

[Asia Economy Reporter Junho Hwang] Where can one find an easy market? Staying ahead of the market is not easy for anyone. Especially in recent times, with rapid rotation and earnings downgrades led by large-cap stocks, it is difficult not only for individual investors, commonly known as 'Gaemi', but also for professional fund managers to generate profits easily.

Jae-eun Kim, a quantitative researcher at NH Investment & Securities, analyzed on the 2nd that nearly half of the active general equity funds with net assets exceeding 5 billion KRW (84 out of 170 samples) are employing strategies that increase their replication rate of the KOSPI, which serves as evidence of this trend.

Funds usually have benchmark indices for comparing returns, and they often compare against the KOSPI. However, fund managers are operating their assets by increasing the replication rate with the KOSPI, thereby reducing the return gap with the benchmark.

This shows how difficult it is to stay ahead of the market recently. Looking at the indicators, the return volatility of large-cap stocks (KOSPI200) was 7.8% as of the end of August, steadily decreasing since the second half of last year and falling below the long-term average of 8.1%. The mid- and small-cap stocks (WMI500 mid-caps) show a similar pattern. As of the end of August, the return volatility of mid- and small-caps was 10.9%, lower than the long-term average of 11.7%.

The fact that the cross-sectional volatility (CSV) of returns among constituent stocks is lower than the historical average means that active funds find it harder to achieve excess returns compared to passive funds. It indicates that active funds managed by fund managers have become less likely to outperform passive funds that track market indices.

This phenomenon appears in fast rotation market conditions. Moreover, once entering such a market, there is a tendency to maintain a prolonged period of low return volatility. This means that both large-cap and mid- and small-cap stocks experience extended periods where generating alpha (α) relative to benchmarks is difficult.

From a portfolio management perspective, it may be advantageous to respond by increasing market replication rates. However, in the current situation where semiconductor demand has slowed, even this is hard to expect.

Researcher Kim explained, "This is why fund managers' concerns are deepening," adding, "At least funds that actively respond to the market are maintaining top returns." The funds he highlighted include VI Holdings Plus, Daol KTB Market Star, and Samsung New Deal Korea.

He noted that, by sector, it is difficult to stay ahead of the market, so "there is a need to focus on companies expected to increase profits regardless of the economic cycle." The sectors he pointed out are secondary batteries and the entertainment sector. He added, "Due to the U.S. Inflation Reduction Act and the Semiconductor and Science Act coming into effect, beneficiary companies, as well as the telecommunications sector from a defensive perspective during the economic downturn, also require attention."

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