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A great source of investment ideas is to look at what other notable investors have been buying. Two such fund managers are Platinum Asset Management, and its breakaway, Antipodes Partners.
A look at their top holdings shows numerous Korean-based businesses. Cheaper in Asia Indeed, South Korean stocks look relatively cheap with the main index – KOSPI – having fallen 18% over the past year.
According to Platinum, the market aggregated price-earnings ratio is only around 10, and the companies are comfortably profitable with a return on capital employed of about 13.5%. This compares to the forecast price-earnings ratio of around 15 for the S&P/ASX 200 index (we don’t have a comparable profitability measure).
Such headline figures can’t be relied on solely to determine whether its worthy of your investment. We need to consider the underlying businesses that make up the index, and other reasons why value may be on offer.
One argument is that there is a ‘Korean discount’ to adjust for the weak corporate governance of the large family-owned conglomerates, known as chaebols, that dominate the country. Historically, they’ve demonstrated poor capital allocation with weak minority shareholder rights.
Another reason for a discount may be the threat of having a dictator at your doorstep with a penchant for rockets.
High quality, low price
Admittedly, we don’t fully know what the risks are. We do know some Korean businesses are quite cheap, of high-quality, and worth researching further. Take, for example, Samsung Electronics, which makes up nearly 25% of the index.
Samsung’s profits mainly come from semiconductors that are crucial to phones and computers, though the brand is better known for mobiles phones and TVs.
Samsung is a global market leader, yet its stock trades at a price-earnings ratio of just 6.3. Furthermore, nearly 26% of its market capitalisation is made up of net cash.
Mind the fees
So how can you go about buying these stocks? Well, one option would be to invest in the funds of the aforementioned managers, though their funds also include stocks outside of Korea.
For those that want to do their own research and buy Korean stocks themselves, they may be able to do so through their brokers. The fees are typically much higher than buying stocks listed on the ASX and may include charges for currency conversion.
Another way to get broad exposure to the Korean market would be to purchase an exchange-traded fund, or ETF.
iShares have an ETF listed on the ASX – iShares MSCI South Korea ETF (code: IKO) – that holds stakes in Korea’s large and mid-sized companies and largely replicates the Kospi index.
The ETF is a low-cost option (management fees are 0.6% per annum with the same broker costs as local shares) which is important as high fees can hurt your returns over time. Korean stocks represent an interesting opportunity. For those who do want to gain exposure to that market, keep the ETF in mind.
You can find all kinds of ETFs to suit your needs at InvestSMART’s ETF data hub.
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