Bank of Korea Blog 'Characteristics and Implications of Domestic Investment by Global Funds'
Domestic Investment Share of Global Funds at 0.7%
Expansion Centered on Passive Funds... Increased Synchronization with Global Financial Cycle Tightening
The scale of domestic investment in global funds has increased to three times the level at the end of 2009, which is analyzed to contribute to a stable supply of foreign exchange. However, since the correlation with relatively stable advanced country investment funds has strengthened, it is advised to be cautious as this could increase the pressure of foreign securities capital outflows during times of global risk expansion.
According to the Bank of Korea on the 17th, Seungwan Yoon and Jueun Ahn, analysts of the Capital Movement Analysis Team at the International Department, stated this in a recent blog post titled "Characteristics and Implications of Domestic Investment in Global Funds."
Global funds refer to funds that pool investors' money, such as collective investment schemes and mutual funds, to invest in various financial assets. According to the Bank of Korea, the balance of domestic investment global funds at the end of last year was $258 billion, recording 2.9 times the $89.4 billion at the end of 2009.
In particular, from 2010 to 2023, domestic investment global funds saw an increase of $19.4 billion in bond funds and $149.3 billion in equity funds, with equity funds accounting for about 90% of the total scale. By fund type, the proportion of passive funds has steadily expanded.
As of the end of 2023, the share of domestic investment global funds in the worldwide global fund market is 0.7%. This expansion phenomenon has the advantage of contributing to stability in the foreign exchange sector amid a decreasing current account surplus compared to ten years ago. Additionally, the increased correlation with relatively stable advanced country investment funds is a positive change.
However, the Bank of Korea warned that the growing proportion of passive funds and the increased correlation during global financial cycle tightening periods could act as risk factors for the domestic financial and foreign exchange sectors.
The Bank of Korea explained, "Passive funds react more sensitively to global risks," adding, "there is a possibility of increased volatility during crises." Furthermore, it noted that the strengthened correlation of inflows and outflows of domestic investment global funds during global financial cycle tightening periods could increase pressure for foreign securities capital outflows in stress situations.
Moreover, it stated, "To maintain the positive effects of the expansion of global funds while mitigating shocks that may arise in the domestic financial and foreign exchange sectors, it is necessary to expand the base of domestic investors." It added, "Policy efforts are needed to induce residents' overseas investments to act in a manner opposite to foreign investments domestically, thereby functioning as an automatic stabilizer."
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