Korea Fund
Korea Fund (NYSE: KF, $40.66)
It's no secret that domestic stocks have been trounced in recent years by those trading on foreign exchanges. However, when it comes to spicing up a portfolio with some international flare, the choices are almost endless — investors can travel anywhere from Australia to Zimbabwe. We won't quibble with either of those markets, but we will say that South Korea is currently one of the more intriguing plays for those interested in making country-specific bets.
The Case for South Korea
While the overheated MSCI Emerging Markets Index jumped another +29% last year, South Korea's benchmark KOSPI Index inched up just +4% — taking a breather after a sharp +54% run-up in 2005. Not surprisingly, valuation levels in South Korea are now far more attractive than in neighboring countries throughout the Pacific Rim.
In fact, the average company listed on the KOSPI was recently trading at a P/E of less than 11, making South Korea the second cheapest market in all of Asia — trailing only Thailand. Perhaps that's why the late-February sell-off that led to steep double-digit declines in many emerging markets only triggered a mild -6% pullback in South Korea in the ensuing days.
And the favorable valuation levels found in South Korea are even more attractive considering the nation's export-driven economy (Asia's fourth largest) has been expanding at a healthy +5% clip recently. Even without the cooperation of the South Korean Won (which has gained strength in recent years, making exported products more expensive in foreign markets). the country continues to be among the world's largest exporters. Last year, South Korean companies shipped more than $330 billion worth of products abroad. That is over $100 billion more than the levels from just three years ago, and exports now account for about 45% of the nation's $700 billion economy.
South Korea is a world-class producer of ships, as well as automobiles, cell phones, electronics and other products. Most of those goods find their way into China, which has a seemingly insatiable appetite for South Korean products. Exports to China have shot up +30% to +40% in recent years, and with forecasts calling for the Chinese economy to continue growing at +10% annually, this trend is likely to continue.
Of course, this situation has attracted quite a bit of attention lately, particularly from foreign investors. In fact, a recent study by Merrill Lynch found that institutional assets, the so-called "smart money", have been flowing out of China and into South Korea.
In the past, South Korea has had a general reputation for poor corporate governance. However, many companies have cleaned up their act lately, and the country recently passed legislation aimed at encouraging investment. Meanwhile, after surging nearly +40% year-to-date, the KOSPI just reached the 2,000 mark for the first time ever several weeks ago.
Taking Action
While occasional setbacks are likely, we see continued gains ahead for South Korean stocks, and The Korea Fund (NYSE: KF) is great way to gain exposure to this market. The fund's $875 million portfolio is broadly invested in 40 of the country's largest and most established companies, including global leaders like Samsung, Hyundai and POSCO — the latter of which has caught the eye of none other than Warren Buffett.
Over the past decade, the fund has only experienced one down year, racking up impressive annualized gains of more than +19% along the way — outpacing nearly 9 of every 10 Asia-focused funds. And yet remarkably, KF is still trading at a wide -9.8% discount to its NAV, meaning shareholders can scoop up these already undervalued South Korean companies for about 90 cents on the dollar. As we explained earlier in today's issue, this type of discount can lead to powerful returns for investors.
As with any country-specific fund, investors should expect above-average volatility, and we would recommend prudence, particularly if South Korea's exports begin to show signs of a cool-down. Furthermore, due to recent portfolio restructuring, the fund is sitting on a bundle in realized capital gains (about $14.50 per share), which are scheduled to be distributed to shareholders in November.
Tax-conscious investors interested in KF may want to consider placing the fund inside an IRA or other tax-deferred account — or possibly even waiting until after the distribution to avoid the tax bite. Once the capital gain has been paid and the tax liability has been lifted, there is a good chance that demand will pick up and the discount will narrow.
It's no secret that domestic stocks have been trounced in recent years by those trading on foreign exchanges. However, when it comes to spicing up a portfolio with some international flare, the choices are almost endless — investors can travel anywhere from Australia to Zimbabwe. We won't quibble with either of those markets, but we will say that South Korea is currently one of the more intriguing plays for those interested in making country-specific bets.
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While the overheated MSCI Emerging Markets Index jumped another +29% last year, South Korea's benchmark KOSPI Index inched up just +4% — taking a breather after a sharp +54% run-up in 2005. Not surprisingly, valuation levels in South Korea are now far more attractive than in neighboring countries throughout the Pacific Rim.
In fact, the average company listed on the KOSPI was recently trading at a P/E of less than 11, making South Korea the second cheapest market in all of Asia — trailing only Thailand. Perhaps that's why the late-February sell-off that led to steep double-digit declines in many emerging markets only triggered a mild -6% pullback in South Korea in the ensuing days.
And the favorable valuation levels found in South Korea are even more attractive considering the nation's export-driven economy (Asia's fourth largest) has been expanding at a healthy +5% clip recently. Even without the cooperation of the South Korean Won (which has gained strength in recent years, making exported products more expensive in foreign markets). the country continues to be among the world's largest exporters. Last year, South Korean companies shipped more than $330 billion worth of products abroad. That is over $100 billion more than the levels from just three years ago, and exports now account for about 45% of the nation's $700 billion economy.
South Korea is a world-class producer of ships, as well as automobiles, cell phones, electronics and other products. Most of those goods find their way into China, which has a seemingly insatiable appetite for South Korean products. Exports to China have shot up +30% to +40% in recent years, and with forecasts calling for the Chinese economy to continue growing at +10% annually, this trend is likely to continue.
Of course, this situation has attracted quite a bit of attention lately, particularly from foreign investors. In fact, a recent study by Merrill Lynch found that institutional assets, the so-called "smart money", have been flowing out of China and into South Korea.
In the past, South Korea has had a general reputation for poor corporate governance. However, many companies have cleaned up their act lately, and the country recently passed legislation aimed at encouraging investment. Meanwhile, after surging nearly +40% year-to-date, the KOSPI just reached the 2,000 mark for the first time ever several weeks ago.
Taking Action
While occasional setbacks are likely, we see continued gains ahead for South Korean stocks, and The Korea Fund (NYSE: KF) is great way to gain exposure to this market. The fund's $875 million portfolio is broadly invested in 40 of the country's largest and most established companies, including global leaders like Samsung, Hyundai and POSCO — the latter of which has caught the eye of none other than Warren Buffett.
Over the past decade, the fund has only experienced one down year, racking up impressive annualized gains of more than +19% along the way — outpacing nearly 9 of every 10 Asia-focused funds. And yet remarkably, KF is still trading at a wide -9.8% discount to its NAV, meaning shareholders can scoop up these already undervalued South Korean companies for about 90 cents on the dollar. As we explained earlier in today's issue, this type of discount can lead to powerful returns for investors.
As with any country-specific fund, investors should expect above-average volatility, and we would recommend prudence, particularly if South Korea's exports begin to show signs of a cool-down. Furthermore, due to recent portfolio restructuring, the fund is sitting on a bundle in realized capital gains (about $14.50 per share), which are scheduled to be distributed to shareholders in November.
Tax-conscious investors interested in KF may want to consider placing the fund inside an IRA or other tax-deferred account — or possibly even waiting until after the distribution to avoid the tax bite. Once the capital gain has been paid and the tax liability has been lifted, there is a good chance that demand will pick up and the discount will narrow.
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