1. Policy Recommendations to Improve the Role of Asset Management Industry in Aging Korea

Most countries adopt private and public pension systems as aging progresses and accumulation of pension fund usually plays an important role in the development of capital markets and asset management industry. But this effect crucially depends on the soundness of capital markets and the existence of competitive market mechanism in the asset management industry. This study conducts an empirical analysis on the performance and competitiveness of asset management industry to check whether Korean asset management companies can provide quality services to investors that save for their retirement. Based on the analysis results, we propose policy directions to improve the role of asset management industry in Korea. It is especially considered in the study, the fact that the Korean stock market has been rapidly institutionalized as the increased presence of foreign stock investors that are mostly institutional investors were seen in the market.

As aging progresses, most countries adopt private and public pension systems and accumulation of pension fund usually plays an important role in the development of capital markets and asset management industry. Institutional investors in the developed countries have grown steadily since the 1980's and the pace of growth has been accelerated since the 1990's. Institutional investors in Korea have also grown in terms of size but the proportion of stocks in total asset has declined after the financial crisis in opposite to the case of institutional investors in the developed countries. Hence, this study focuses on the role of institutional investors in the stock market. The declining proportion of stock holding of institutional investors in Korea is partly due to the conservative asset management strategy of institutional investors after the financial crisis. But the main force behind this phenomenon seems to be low confidence of households on the stock market , who lost fortune during the KOSDAQ market bubble and fund industry boom-bust between 1999 and 2000. Meanwhile, the foreign institutional investors have increased their ownership in the Korean stock market with confidence that they would act as the restraining forces to managements of listed companies. To cope with increased market presence of foreign institutional investors and market demand of asset management service for the retirement savings of households, it is desirable to enhance the role of domestic institutional investors.

The empirical analyses of this paper are composed in two parts: Performance and persistence of performance of asset management companies, current market competition mechanism of asset management companies, and evaluation of government policy to induce long-term investment in the stock market. First, while the underperformance of actively managed fund of the fund industry in the United States does not appear in the Korean fund industry, the persistence of fund performance is significantly observed. Second, the relationship between past performance and fund inflow gets stronger since the financial crisis. This implies that, in addition, this phenomenon is mainly led by "independent" asset management companies, which are affiliated to neither commercial banks nor investment banks.

Moreover, it is necessary to check whether fund selling institutions, especially banks, are abiding by required information provision given that there seems to be no relationship between the past performance and fund inflow in the case of bank-owned asset management companies.
Given the fact that the growth of long-term retirement savings has played a crucial role for the development of asset management industry in the developed countries, it is necessary to promote long-term retirement savings to be invested in the asset management markets. In the United States, the successful growth of asset management industry is mainly due to the following three factors: Sound capital market, various long-term retirement savings programs, and continuous improvements of asset management regulation and enhancements of information disclosure on investment products. Taking the case of the United States, we propose the following policy directions. As for the inducement of long-term investment, we recommend the following policies. First, to promote the IRA (individual retirement account) programs in Korea as a major retirement savings tool, we propose to link the IRA with monthly allotting fund, which received increased popularity recently. Second, the targeted savings programs with tax benefit (housing, education etc.) should be allowed in the asset management industry to alleviate the current concentration of financial assets of households on bank deposit. Meanwhile the regulation around institutional investors including asset management companies should be modified to provide reliable investment environments to investors. First, we propose more detailed portfolio holdings of institutional investors including foreign investors to cope with their increasing market power as the SEC does through 13-F rule. Second, we propose to allow asset management companies to sell funds directly to individual investors and to strengthen supervision on the operation of sales activities. In addition, the information relevant to the fund investing such as fees, past performance, prospectus, etc. should be provided more efficiently. Third, the enforcement of regulator on illegal activities should be strengthened to warrant confidence of investors.

The economic and social burden will increase rapidly as aging progresses in Korea. To provide stable income and minimum level of livelihood for the elderly, it is unavoidable to establish social safety nets such as the public pension system. But, if households themselves try to prepare for their retirement periods the economic and social burden would be alleviated in the future. Thus, it is desirable to induce households to save for the retirement voluntarily in diversified way through appropriate policy support. In addition, the financial regulators should warrant sound and transparent asset management markets for investors by imposing strict enforcement on illegal activities in the market and enhancing information flow of investment products.

2. Policy Agenda to Encourage Long-term Government Bond Market in Korea

Long-term bond market in Korea, especially the long-term government bond market is still in its infancy, although there have been many researches to argue the necessity to promote long-term government bond market. It is obviously true, even there have recently been significant shifts in policy stance concerning the government bond market toward promoting long-term government bonds, that ten-year maturity government bonds are rarely traded in the secondary market and there is practically no market for the bonds with maturities over ten years.

On the other hands, the almost unprecedented progress of aging in Korea has brought up the importance of the long-term bonds. Even though the long-term bond does not necessarily mean long-term government bonds, few entities but the government and government-sponsored enterprises can issue these bonds considering various risk factors, especially the credit risk, related to managing portfolio mainly consisting of long-term bonds. Therefore, the paper aimsto recommend policy prescriptions to promote long-term bond markets with the special reference to the long-term government bond market.

The paper argues that there are at least three important reasons to firmly institute well-functioning long-term bond market in Korea. First, it is expected that the long-term bonds play an important role in facilitating necessary saving devices for the aging population.

The advancement of aging society along with the growing economy increases demand for the contractual savings such as pensions and long-term life insurances. Due to fundamental characteristics of such financial instruments that they are mainly employed to finance smooth consumption after retirement, it is required that the portfolio should be managed with relatively long time horizon. Long-term bonds, especially the long term government bond is a quite suitable device to meet the demand. In Korea, it is now a well-known proposition that the asset under the management of the National Pension Fund (NPF) will increase with unimaginable speed so that the NPF will completely dominate the domestic capital market unless some dramatic changes occur sooner rather than later. Even with recent endeavors to diversify its portfolio by NPF, the lion's share of its portfolio will be assign to fixed income securities and that further reinforces the necessity of developed long-term government-bond market. Second, along with deepening of the capital markets and advancing portfolio management skills, the demand for long-term bond has been significantly increased stemming from various financial institutions.

Third, though it is generally accepted that the yield curve is one of the most important infrastructure in modern finance, it is practically impossible to draw a reliable yield curve mainly due to the lack of well-functioning long-term bond market.
Since the introduction of primary dealer system and competitive auction in the primary market for the government bonds in 1999, many policy measures have been taken to improve the institutional structure of both in the primary and secondary markets for government bonds so that no significant overhaul except for some fine tuning is urgently required in the institutional arrangements. The analysis based on international comparison reveals that in spite of recent rapid expansion in its size, the government bond market in Korea is still small. The paper suggested two factors as the reasons: Historically hostile atmosphere against the expansion of government debt and conservative fiscal stance. The paper, therefore, argues that it is very difficult to expect a swift expansion of government bond market exceeding the current trend unless some fundamental changes happen in the two problem areas. Moreover, the analysis indicates that in spite of recent policy shift to promote long-term government bond market, the supply and trading of those bonds are not satisfactory in terms of international standards.

With the presumption that the development of long-term government bond is closely related to the development of overall government bond market, the paper examines several important policy agenda to support the development of government bond market: Reforming the primary dealer system to encourage competition among primary dealers, promoting when-issued market to enhance the efficiency of price discovery and market liquidity, inducing wider participation of foreign investors in Korean government bond market, re-evaluating the current policy stance on the relationship between secondary market operated by the Korean Stock Exchange and inter-dealer broker market operated on OTC basis.

In terms of developing the long-term bond market, the paper proposes three important policy agenda: Taking a cautious approach in increasing the supply of long-term bond not to impair the liquidity of shorter-term government bond markets, introducing STRIP and futures for the long-term government market to meet diverse demand of investors, promoting mortgaged-backed securities to compliment long-term government bond in dealing with demand for long-term savings.

발간사
요 약

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