Greetings!
As Olympic snowboarders hurtle up and down the slopes outside of PyeongChang, you may question where South Korea fits in your portfolio – especially if you know its index catapulted 48% last year
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South Korea boasts the 11
th
largest economy in the world and is a member of the elite OECD and G-20
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. Given its economic success, the International Monetary Fund (IMF) considers South Korea to be an advanced country
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. However, MSCI which creates the benchmark for over $1.6 trillion in Emerging Market (EM) funds considers South Korea to be an emerging market and gives it a huge weighting of 15%
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. In contrast, S&P constructs the other major EM index and S&P excludes Korea in its core EM portfolio, includes it at 15% in its EM Plus portfolio
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, and includes it in its advanced market index at 5% of its Developed ex-US index
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. Given South Korea’s importance and success, you may want to understand where and how your portfolio is exposed to this country -- or if you are missing out on this market.
South Korea’s GDP per capita is almost $30,000, far above that of most emerging markets like Brazil, Russia, China, and Turkey, which stand around $10,000 per capita
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, but MSCI has so far refused to upgrade Korea to developed country status because it does not consider its stock market to be developed or open enough for inclusion in the advanced index
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The Korean stock market limits foreign investor access through currency controls and trading restrictions so MSCI keeps South Korea at emerging market status. In contrast, S&P placed Korea in its developed country index more than 15 years ago -- in 2001
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If your portfolio has a mix of fund families, you may be overexposed – or not exposed – to South Korea. Given the iShares MSCI South Korea Capped ETF (EWY), catapulted up 44% in 2017 but was down -12% in 2014
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, you may want to figure out your exposure to Korea.
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If your EM funds use MSCI as a benchmark, you should be aware that a significant portion of these funds are dedicated to Korea and other Asian nations at the expense of other regions
. The chart on the right is taken from the MSCI website which indicates that Asia is 70% of its EM index
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. South Korea has a GDP per capita of $29,115 while that of Taiwan is $24,000 – these are akin to that of Italy and far above the world’s GDP per capita of $10,000 which is on par with Russia, Turkey, and Brazil
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which you would think should have a higher representation in an emerging market index than these advanced economies.
In fact, in the MSCI EM index, the small nation of Korea has an equal weighting to India and Brazil combined.
South Korea’s representation in the MSCI is dominated by Samsung – which is 30% of the MSCI Korea index
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and over 4% of the global EM index
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– larger than all of Russia.
In contrast, S&P states that, “South Korea has been ineligible for inclusion in the S&P Emerging BMI,”
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and charts S&P’s out performance from September 06 to September 2012. S&P notes that its EM index also includes small cap stocks which are not included in the MSCI index. If you own a fund based on the MSCI EM benchmark, you may want to pay closer attention to the trials and travails of Samsung given its hefty weight in the MSCI EM index.
The EM indices can be confusing and misleading in other ways – if you own an EM fund, you should know what Tencent is, as it likely is the largest holding in your fund -- akin in weighting to all of Brazil and double of Russia.
Check out my white paper on Misleading Emerging Markets at
http://www.metapointadvisors.com/
to learn more. I welcome your feedback and forwards or referrals to friends and colleagues.
I would also be happy to speak with you on an individual basis about your own investment concerns
Best regards,
Maya
The opinions expressed are those of the author and not necessarily those of Lincoln Financial Advisors Corp.
CRN-2034912-022118
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Maya is a Harvard-trained economist who leverages her two decades of top-level experience across Wall Street, the City of London, emerging markets, and advanced technology to devise investment strategies for her clients. She founded Meta Point Advisors after several years as a Financial Advisor at Merrill Lynch. Maya's clients benefit from her ability to provide savvy active management without the cumbersome costs and structure of mutual funds. She has been quoted in the Wall Street Journal and Barron’s.
Marisa Joelson holds a MPA from Harvard Kennedy School, a MBA from Kellogg at Northwestern University, and a BA from Wesleyan University.
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Sources:
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MSCI. “MSCI Korea Index (USD)”. P. 1.
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World Economic Outlook: October 2017. International Monetary Fund. P.2. p. 243.
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MSCI. “Emerging vs. Developed Markets Classification: Why It Matters to Investors?” Investor Insight. November 2012.
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S&P Dow Jones Indices. S&P Global BMI, S&P/IFCI Methodology. P. 17.
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MSCI. MSCI Korea Index (USD). P. 2.
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S&P Dow Jones Indices. “Emerging Markets: What’s in your Benchmark.” www.spdji.com.
Marisa Joelson is a Registered Representative of Lincoln Financial Advisors Corp. Securities and Investment Advisory services offered through Lincoln Financial Advisors Corp., a Broker Dealer (member SIPC) and a Registered Investment Advisor. Insurance offered through Lincoln affiliates and other fine companies. Meta Point Advisors is not an affiliate of Lincoln Financial Advisors Corp. CRN-1853234-072117
Lincoln Financial Advisors Corp. and its representatives do not provide legal or tax advice. You may want to consult a legal or tax advisor regarding any legal or tax information as it relates to your personal circumstances.
If you do not want to receive further e-mails from me, please email me at
Maya.Joelson@lfg.com
or call me at (703) 749-5053.
Do not leave trading instructions on this email. If you need to place a trade, call the LFA trade desk at 800-237-3815.
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