1. Enactment of Trust Deeds

 
trust deed for a contractual-type fund prepared by a management company should be reported to the FSS in advance. Since June 1993, a standard trust deed has been introduced to stimulate the establishment of funds by reducing the reporting time limit. The standard trust deed made by AMAK sets out the key points of an ordinary trust deed such as investment objectives, fee schedule, and redemption charges. If the management company wants to establish funds within the scope of the standard trust deed, it can establish funds first to meet market demand promptly and report the trust deed to the AMAK within seven days after establishment.

In addition to the trust deed, the manager should submit relevant documents that describe the investment policies and schedule of issue of units at the time of reporting a trust deed. Amendments to a trust deed should be reported to the FSS in advance, but in case an amendment is covered by the standard trust deed, it may be reported to AMAK no later than seven days after it has been made.

Meanwhile, amid a rapidly changing financial environment and owing to the requests of investors, demand for the development of products with various structures has been increasing. As a consequence, there have been demands that the self-regulatory function of asset management companies in enacting trust deeds should be strengthened.

 
 

2. Classification based on additional issues of units

 
Investment trusts are divided into two types based on the allowance for additional issues of units.

A. Open-end Type

New issues of units may be made upon a request from investors, and the amounts raised are added to the initial establishment amount and managed together as one investment trust. This type of investment trust, which can issue and sell additional beneficial certificates at any time, is the most common type of trust. In this case, generally there is no termination date for the investment trust.

B. Closed-end Type

This type of investment trust cannot make additional issues of units after the initial establishment. With the fixed size of the trust, the assets may be managed more effectively over the long-term and generate higher rates of return than open-end investment trusts. Especially this type of investment trust is preferred when bond yields are expected to decline as the trust will be able to lock in high rates of return. A closed-end investment trust can improve its liquidity by listing on the Korea Stock Exchange (KSE). The life of the trust is determined by the management company at inception and the minimum period is six months.

 
 

3. Partial or Whole Cancellation of an Investment Trust

 
A sales agent has been able to request the management company to cancel a portion of the units in an investment trust when it has not sold beneficial certificates that have been issued. If it is necessary in order to protect the interests of the public or the beneficiaries, a manager may cancel all the units in an investment trust on approval from the FSC. However, in case the total number of units outstanding in an investment trust is less than a certain amount (five billion units for an equity-type, ten billion units for a bond-type), the management company may make a complete cancellation by reporting to the FSC.
An asset management company may terminate an investment trust after obtaining approval from the FSC; provided that, this shall not apply to cases that do not raise any concern over the possibility of damaging the interests of beneficiaries and fall under each of the following subparagraphs:
  • in case that all the beneficiaries agree to the termination
  • in case that the investment trust¡¯s capital amount does not reach 10 billion won for one consecutive month
  • in case that the asset management company wants to terminate its investment contract upon the request of beneficiaries for full redemption of beneficiary certificates of its investment trust
 
 

4. Type of Investment Trusts

 

A. Classification by Investment Objective

   The four main types of investment trusts are (i) equity investment trusts, which invest more than 60% of their total assets in equities or equity related securities such as KOSPI 200 index futures and options; (ii) bond investment trusts, which invest more than 60% of their assets in bonds or interest rate futures; (iii) MMFs, which mainly invest in short-term financial products such as CPs and CDs; and (iv) hybrid investment trusts, which are not classified under any of the above categories.

   Equity funds can further be classified as growth-type, growth income-type, and income-type based on their investment plan. The standard trust deed for equity-type trusts allows these kinds of trusts to invest in KOSPI 200 index futures and options up to an amount equal to the permitted level of stock investment of the trust.

<Classification of Equity Fund>

Classification

Criteria

Growth-type

An investment trust that is required under the terms of its trust deed or investment plan to invest more than 70% of its net assets in equities.

Income-type

An investment trust that cannot under the terms of its trust deed or investment plan invest more than 30% of its net assets in equities.

Growth Income-type

An investment trust that aims under the terms of its trust deed or investment plan to balance growth and income by restricting investment in equities to between 30% - 70% of net assets.


   Bond investment trusts invest a large portion of their assets into corporate bonds and aim to invest in bonds that are of high quality in terms of their credit rating and issue terms. As the management fees for bond investment trusts are lower than those of MMFs, bond investment trusts can offer higher returns for investment periods lasting at least one year.

   MMFs, which were created to attract short-term funds, invest mostly in short-term financial instruments. They are particularly attractive when financial markets are unstable and the interest rate is expected to rise.

 
<Trends by fund type>
 

B. Investment Trust with Tax Benefits

   In order to promote long-term savings, retirement planning, or some specific industries, the government provides some investment trusts with exemption from or reduction of withholding taxes.


<Classification of Tax Benefits Funds>

Classification

Contents

Personal Pension Fund

Taxable income reduction (40% of invested amount), no withholding tax

Pension Fund

Taxable income reduction (100% of savings amount up to 2.4 million won per year)

Employees' Equity Fund

Income tax reduction (5% of savings amount), no withholding tax

Separate Taxation Fund

Shares of the fund can choose the tax rate of 30% of the income from the fund, which is then excluded from their total annual income for consolidated tax

Tax-benefit Total Savings Fund, Old-age Pension Fund

Tax reduction on income gains (tax rate for taxable income reduced from 22% to 10%)

Tax-exempt High-yield High-risk Investment Trust

No withholding tax
 

C. Investment Trust with Special Structure

   1) Umbrella fund

      A group of investment trusts that are distinct in character and established under the same arrangement that allow investors to switch between the funds according to the market conditions without paying redemption or switching fees.

   2) Fund of Funds

      This type of investment trust is part of an arrangement in which the trust assets of several sub-investment trusts invest in the beneficial certificates of one or more parent investment trusts that are distinct in character. Each of the sub-investment trusts purchases the beneficial certificates of the appropriate parent investment trusts in an appropriate amount, in accordance with the respective investment objectives of the trust. The actual management of assets of the sub-investment trusts is effected by the management of the parent investment trusts, which hold simplified portfolios; this arrangement allows for more efficient and cost-effective management than would be possible if a trust managed its own portfolio directly.

   3) ETF (exchange traded funds)

      It is an index-based investment fund that is listed and traded on the stock exchange or KOSDAQ market. Establishment of these funds has been permitted since October 2002. An investment trust may invest up to 30% of its total assets in ETFs.

 
 

5. Current Trend - Tremendous Popularity of Installment Savings-Type Funds

 
   An interest rate of 4% inflation rate and a deposit interest rate of 4% indicates a negative real interest rate. Instead of sticking to a deposit with a fixed interest rate, therefore, investors have been looking for alternative investments allowing them stability and profitability, which has led to increasing demands for savings-type funds. Accordingly, the low interest rate trend is the most influential factor behind new cash inflows into the industry

   Korea officially became an aging society in 2000 when people aged over 65 made up about 7% of the population. Amid increasing necessity, people are concerned about how to make funds for their future lives owing to uncertainty about existing financial products in terms of stability and profitability. Therefore people have become interested in savings-type funds that enable higher returns with relatively small amount of money.

   With the high profile of savings-type funds, distributors have exerted every effort to undertake the related marketing activities. Competition among banks, which have powerful sales networks, to sell such funds has been becoming increasingly tougher, and securities companies have been bracing themselves for this competition by trying to widen their activities and develop new revenue sources. As a result of such aggressive marketing activities, investments in savings-type funds have been being boosted.

   Installment savings-type funds make it possible for fund managers to make long-term investments in quality stocks, which can reduce the volatility of stock prices. This then enables the stock market to become bullish together with other factors such as improving performances by companies, enhanced demand-supply relations, low interest rates, etc. Also a bullish stock market induces more investors to invest in the stock market producing a virtuous cycle.