In 2017, South Korean officials arrested Lee Jae-yong, the vice chairman of Samsung and the scion of an immensely wealthy and powerful family. Samsung makes up around 25 percent of the Korean index, the KOSPI and is one of the notorious ‘chaebols’ that dominate the country’s economy.
The word ‘chaebol’ comes from the combination of the characters for “rich” and “clan.” It applies to large groups of interconnected companies that are usually dominated by a wealthy family and the resulting poor corporate governance has put international investors off the Korean market for years.
However, Weiss Korea Opportunity Fund (WKOF), a listed investment company on the AIM market, has a canny way of playing what is optically a very attractive market due to its strong tech exports. Companies run by chaebols tend to issue lots of preference shares, or non-voting shares, so investors can enjoy the benefits of gains and dividends but not vote out members of their tight knit boards.
The good news for investors is that preference shares tend to trade at a large discount to common shares and as WKOF is solely focused on this class, the fund trades at a 50 percent discount. This is a discount to common shares, not to its NAV, which according to the fund’s head of investor relations Mark Lewand, stays within a narrow band, currently 2 percent. If this widens, he says that management will immediately start a programme of share buybacks to narrow the discount.
Double barrelled benefit
While WKOF gives investors access to some of the world’s leading companies, such as electronics firm LG, car makers Hyundia and Daewoo at half the price, preference shares also pay out slightly more in dividends. Although Mr Lewand says that Korea is about 10 to 20 years behind Japan in terms of corporate governance reform, it is happening slowly.
Companies that in the past would not pay out any dividends are beginning to make distributions so by holding WKOF investors are essentially getting twice the income as they’ve paid half of the price of common shares.
When it comes to portfolio construction, Mr Lewand says it starts with the discount. For instance, the aforementioned Samsung is no longer held by the trust although they bought shares in the tech giant when the preference shares were at a 42 percent discount to their common share equivalents in 2013. At the beginning of the year, this discount had narrowed to just 8 percent. Although non-linear, this narrowing of the gap between share classes represents a gain of around 80 percent, which the trust locked in and then went looking for companies trading on wider discounts. There are around 120 stocks on the index with a preference share class.
Emerging or developed?
One of the peculiarities of South Korea is that some index providers class the market as developed (FTSE) while others rate it as an emerging economy (MSCI). There are some technical reasons behind MSCI’s decision, for instance Korea’s ban on short selling suggests its market infrastructure is not sophisticated enough to be considered ‘developed’ but other than that Korea has all the hallmarks of an advanced economy.
There are two types of chips used by devices such as smart phones, memory chips and logic chips. Korea is the world leader in the production of memory chips with Samsung and SK Hynix being the two largest suppliers of these semiconductor derived devices.
Given the global competition in the semi-conductor market with players including the US, China and Taiwan all battling it out for the crown, Korea’s 40 percent share of the memory chip market puts the country among the top economies in the world regardless of how it’s classified.
