[Practical Finance] Waiting for LG Energy Solution and Kakao Bank Big IPOs but Prohibited from Multiple Applications... The Answer is IPO Funds

Reduce the Hassle of Direct Subscription for IPOs by Investing in Funds
Attractive Stable Returns... 13.2% Annual Yield
Carefully Check Allocation Volume and Temporary Sales Suspension

[Asia Economy Reporter Lee Seon-ae] With the prohibition of duplicate subscription for public offering stocks, interest in public offering stock funds is intensifying. Especially in the second half of the year, as major companies such as LG Energy Solution and Kakao Bank are lined up for IPOs (Initial Public Offerings), the enthusiasm for investing in public offering stocks is expected to remain strong, making public offering stock funds an alternative to the ban on duplicate subscriptions. Public offering stock funds are funds that invest a portion of their assets in public offering stocks, reducing the hassle of directly subscribing to public offerings and allowing indirect investment in public offering stocks. Except for KOSDAQ venture funds, most public offering stock funds operate with the majority of their assets in bonds while generating excess returns through public offering stocks. Public offering stock funds can be categorized into high-yield funds, KOSDAQ venture funds, and general public offering stock funds depending on their asset composition.

◆ Inflow of Large Funds into Public Offering Stock Funds = As competition for public offering stock subscriptions intensifies, investors' attention is turning to public offering stock funds. Their appeal is heightened by their stable returns. According to Daishin Securities on the 23rd, the average return of public offering stock funds over the past 10 years was 3.4%. If based on the recent one-year return, it is even higher. According to financial information provider FnGuide, the one-year return of public offering stock funds is 13.2%. The volatility of returns for public offering stock funds is lower compared to domestic equity funds and domestic bond funds. In other words, returns are lower than domestic equity funds but higher than domestic bond funds. This is generally because they pursue both interest income and capital gains by simultaneously investing in domestic bonds, public offering stocks, and equities.

Capital inflows into public offering stock funds have been continuous. This is due to the ban on duplicate subscriptions starting from the 20th. Going forward, securities firms must verify investors' duplicate subscription status through the Korea Securities Finance system when allocating public offering stocks. According to FnGuide, as of the 18th, there were 137 public offering stock funds with a total establishment amount of 6.7363 trillion KRW and net assets of 7.9092 trillion KRW. Since the beginning of this year alone, 3.6294 trillion KRW has flowed in, while during the same period, 950.4 billion KRW has been withdrawn from domestic equity funds, confirming the high popularity of public offering stocks.

Looking at individual funds, the fund that attracted the most capital over the past year (as of the first week of June) was the ‘KTB Block Deal Public Offering High Yield Securities Investment Trust,’ which saw an inflow of 346 billion KRW. Following were ‘Kyobo AXA Public Offering High Yield Plus Securities Investment Trust’ (237.1 billion KRW), ‘Eugene Champion Public Offering Securities Investment Trust’ (198.8 billion KRW), and ‘DGB Public Offering Plus Securities Investment Trust’ (198.2 billion KRW).

Regarding the one-year returns of public offering stock fund products, ‘Brain KOSDAQ Venture Securities Investment Trust (Mixed Stock) Type AE’ recorded the highest at 75.11%. ‘Hana UBS KOSDAQ Venture Company & Public Offering Securities Investment Trust [Mixed Stock - Derivative Type] Class C-F’ followed with a return of 56.56%. Next were ‘Plus Korea Representative Growth Securities Investment Trust 1 (Stock) Type C-s’ (51.41%), ‘Samsung KOSDAQ Venture Plus Securities Investment Trust 1 [Stock] A’ (44.57%), and ‘KTB KOSDAQ Venture Securities Investment Trust [Mixed Stock] Type S’ (41.06%).

As more investors seek public offering stock funds, the industry is releasing various products. Rico Asset Management recently launched a loss-defense type public offering stock fund that enhances the stability of public offering stock investments. The target return is about three times the interest rate on deposits. Lee Sang-beom, CEO of Rico Asset Management, said, "In a low-interest-rate period, abundant liquidity in the market has nowhere specific to go, and with major companies like Krafton, Kakao Bank, and Kakao Pay expected to come out, the public offering stock market is anticipated to have a hot summer."

Truston Asset Management introduced the ‘Truston KOSDAQ Venture Public Offering REITs Fund,’ which uses KOSDAQ venture public offering stocks and REITs investment as its basic management strategy. The fund focuses on reducing volatility through hedge strategies using index futures and steadily generating profits through IPO priority allocations.

BNK Asset Management recently launched the ‘BNK Public Offering High Yield Securities Investment Trust No.1 (Bond Mixed),’ which invests in high-yield bonds along with priority allocation benefits to increase expected returns. Interest in high-yield funds is growing as the public offering priority allocation benefit has been extended until 2023. KTB Asset Management renamed its ‘KTB KOSDAQ Venture No.2’ fund to ‘KTB KOSDAQ Venture Public Offering Focus’ and changed its management strategy. The key point of this renewal is to focus on public offering stock returns by utilizing KOSDAQ hedge strategies.

◆ Mandatory Investment Prospectus and Caution on Soft Closing = When investing, it is important to note that the allocated volume per fund may decrease, and the performance of public offering stock funds may not meet expectations.

Public offering stock funds employ a strategy of securing stable returns through bonds and then obtaining excess returns through public offering stocks and equities. On average, the stock allocation ratio of public offering stock funds is about 20.38%, and the domestic bond allocation ratio is the highest at 41.64%. However, the management strategy of public offering stock funds depends on the discretion of the fund manager, so there are slight differences between funds.

High-yield funds (high-risk, high-return investment trusts) invest more than 45% in high-yield (high-return) bonds and KONEX stocks, and including these, invest more than 60% in domestic bonds. The remaining 40% varies according to the management strategy of the asset management company. The structure is to secure stable returns through bonds and then generate additional returns through public offering stocks and equity management. The lead underwriter must allocate at least 5% of the public offering stocks to high-yield funds (public offering stock priority allocation benefit) when allocating public offering stocks. This provides an advantage in securing public offering stock volumes.

KOSDAQ venture funds are funds that must invest more than 50% of the total investment in KOSDAQ-listed companies and venture companies (including companies within 7 years after deregistration as venture companies). KOSDAQ venture funds invest in KOSDAQ and venture companies that can expect co-growth along with innovation company fostering policies and are also noted as tax-saving products due to income deduction benefits. For IPOs aiming for KOSDAQ listing, at least 30% of the public offering stocks must be allocated to KOSDAQ venture funds (KOSDAQ company public offering stock priority allocation benefit). Therefore, they are influenced by the KOSDAQ market returns.

General public offering stock funds can freely determine their management strategies and asset ratios by fund. General public offering stock funds do not receive public offering stock priority allocation benefits. Most general public offering stock funds operate with the majority of their assets in bonds while generating excess returns through public offering stocks. Daishin Securities emphasized, "Since detailed management strategies differ by fund, it is advisable to refer to the fund investment prospectus before making an investment decision."

Kim Hoo-jung, a researcher at Yuanta Securities, said, "There are soft-closing (temporary sales suspension) products to protect existing investors, so it is necessary to check which public offering stock funds are available for investment," and added, "To select good products, it is important to carefully examine the stock ratio among available products and whether it matches the investor’s investment style."