Hantoo Asset Management "Focus on 'Shareholder Returns' over Low PBR... Attention to Mid- and Small-Cap Stocks" (Comprehensive)

"It is more likely that companies capable of shareholder returns, rather than simply listed companies with low price-to-book ratios (PBR), will become the protagonists. Structurally, small and mid-cap stocks are expected to be more advantageous."

Kim Ki-baek, Head of the Small and Medium Value Team at Korea Investment Trust Management, is giving a presentation at the shareholder return seminar held at the Korea Financial Investment Association on the 22nd. Photo by Korea Investment Trust Management

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Kim Gi-baek, head of the Small and Mid-Cap Value Team at Korea Investment Management, said at the seminar "The Era of Shareholder Returns, Changes in the Korean Stock Market" held on the 22nd at the Financial Investment Association in Yeouido, "The key is not low PBR but aligning the interests of controlling shareholders and general shareholders through strengthening and institutionalizing corporate shareholder returns."

Kim is a fund manager operating the Korea Investment Small and Mid-Cap Value Fund and the ACE Shareholder Return Value Active Exchange-Traded Fund (ETF), and is also the author of the book Compete with Hidden Premium Blue-Chip Stocks in the Era of Shareholder Returns.

Kim evaluated that the domestic stock market is undervalued compared to overseas markets. He explained, "Korea's PBR is around 0.99 times, which is lower than the average of 4.6 times for U.S. listed stocks and 1.4 times for the Nikkei 225 index in Japan," adding, "Countries with lower PBR than Korea, such as Colombia and Argentina, are places where financial markets essentially do not function properly."

He judged that low shareholder return rates, low corporate growth potential, and profitability are discount factors for the Korean stock market. He pointed out, "Ultimately, the core issue is the low shareholder return rate caused by opaque corporate governance," and added, "Because the market does not protect shareholders' rights, it cannot be revalued."

Kim expressed hope that the Korea discount could be resolved. He cited the growing power of shareholder activism and the advancement of government and financial markets as optimistic factors. He explained, "Government institutional changes such as dividend system reforms, the social atmosphere for enhancing shareholder value including activist funds and shareholder coalitions, and the strengthening of shareholder return policies due to generational changes in corporate management have all come together." He added, "The phenomenon of aligning the interests of controlling shareholders and general shareholders is emerging."

In the phase of resolving low PBR, it is important to select listed companies that can strongly return value to shareholders. He emphasized, "Companies that can strengthen shareholder returns can be identified through net liquid assets and earnings value."

He also suggested focusing on small and mid-cap stocks rather than large caps in the era of shareholder returns. Large caps have already completed some governance restructuring, such as establishing holding company systems. Kim analyzed, "Mid-sized and small companies are now experiencing governance changes from the first to the second generation," and "Unlike large companies that already record shareholder return rates around 30%, there is greater potential for shareholder return rate increases in the future."

He added, "The conditions for mid-sized and small companies to sustain shareholder returns largely overlap with the conditions for blue-chip stocks," and "It is not easy for individual investors to find and analyze information on these stocks." He said, "Investment products like the Korea Investment Small and Mid-Cap Value Fund and the ACE Shareholder Return Value Active ETF, where fund managers select companies and invest, will be good alternatives."

Sangjin Jeong, Executive Director and Head of Equity Management at Korea Investment Trust Management, delivering a greeting at the seminar "The Era of Shareholder Returns, Changes in the Korean Stock Market" held on the 22nd at the Korea Financial Investment Association in Yeouido, Seoul. Photo by Hyunseok Yoo

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The Korea Investment Small and Mid-Cap Value Fund and the ACE Shareholder Return Value Active ETF were first launched in 2007 and 2022, respectively. They invest in companies with good quality of earnings and capital that have opportunities to transition from value stocks to growth stocks. Kim has been the lead portfolio manager for the Korea Investment Small and Mid-Cap Value Fund since 2014 and for the ACE Shareholder Return Value Active ETF since its listing. The ACE Shareholder Return Value Active ETF is the only ETF that incorporates the keyword 'shareholder return' in its product name.

Kim predicted that the number of listed companies striving to increase shareholder value will grow and that shareholder return activities will increase in the future. He emphasized, "In the past, the term 'shareholder return' itself was taboo, but now companies are actively discussing it," adding, "Since companies, policies, and society are interlinked, this will not be a one-off phenomenon."

Meanwhile, at the seminar, Jeong Sang-jin, Executive Director and Head of Equity Management at Korea Investment Management, who gave the opening remarks, cited the history of the shareholder value enhancement movement in the U.S. and predicted that the shareholder return trend currently sweeping the Korean stock market will gradually become a social norm.

Jeong said, "Since Benjamin Graham's proxy fight with Northern Pipeline in the U.S. in 1927, shareholder return rates have risen to about 90%," and forecasted, "Recently, with institutional improvements such as amendments to the Commercial Act and supply-demand factors like foreign buying, undervalued stocks will attract attention."

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