South Korean preferred shares, have, for the majority of the last year or so, traded at a record historic discount to their common counterparts. However, within the last two months the preferred equity class has undergone some-what of a rerating, as surging levels of corporate cash boost the outlook for dividend payouts. In particular, according to data supplied by Bloomberg, at the end of November the preferred stock of the five largest listed South Korean companies was up 36% year-to-date. In comparison, the common stock of the companies in question declined 5.8%. What’s more, at the end of November, preferred shares still traded at a 51% discount to the common shares.
Andrew Weiss knows South Korea’s potential
South Korea’s potential was brought up at the Ira Sohn conference in London by Andrew Weiss, President and CIO of Weiss Asset Management. One of the points raised by Weiss was the changing corporate climate within South Korea. For example South Korea’s new president, who took office in February, has pledged to strengthen sentences for corporate crime and make executives more accountable for poor decisions. So it would appear that improving corporate governance, stronger balance sheets and attractive valuations are all drivers behind the current rerating.
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While this presents a great opportunity, it is difficult for the average investor to gain exposure to this market. Actually, as far as I’m aware there are no ETF’s that provide exposure to South Korean preferred stock. However, there is the WEISS KOREA OPPORTUNITY FUND, which trades on the Alternative Investment Market, (AIM) section of the London Stock Exchange.
Korea opportunity fund’s holdings in South Korean companies
The Korea opportunity fund is focused on South Korean preferred stock and well as the South Korean market. The largest holdings include Samsung Electronics Co., Ltd. (LON:BC94) (KRX:005930), Hyundai Motor Co (KRX:005385) (OTCMKTS:HYMLF) and the iShares MSCI South Korea Index Fund (ETF) (NYSEARCA:EWY); for exposure to the wider South Korean market.
Samsung Electronics Co., Ltd. (LON:BC94) (KRX:005930) currently trades at a P/E of 5.3 and offers a cash dividend of 500 KRW, an indicative yield of 0.5%. The Hyundai Motor Co (KRX:005385) (OTCMKTS:HYMLF) currently offers a dividend of 1,950 KRW, an indicative yield of 0.2%.
Korea Opportunity Fund performance
With an initial market capitalization of £100 million, the Korea Opportunity Fund is small enough to fly under most investors’ radars but its performance since inception, earlier this year, has been impressive.
The fund is structured as an investment trust, so it is possible for it to trade at both a discount and premium to its net asset value. Indeed, at present the fund trades at 121p per share, a premium to its net assets value of 12%. Last published net asset value was 108p per share. Still, since inception in May 2013 the fund has gained 21%, a performance on a par with many stock indexes.
In a market where value is becoming increasingly hard to find, perhaps South Korea is the place to look.