Collective investments

Collective investment (집합투자) is widely conducted as a way of investing money alongside other investors in order to benefit from the inherent advantages of working as part of a group. These advantages include an ability to:
 * hire a professional investment manager, which theoretically offers the prospects of better returns and/or risk management;
 * benefit from economies of scale - cost sharing among others; and
 * diversify more than would be feasible for most individual investors which, theoretically, reduces risk.

Under the Financial Investment Services and Capital Markets Act (the "Capital Markets Act", 자본시장과 금융투자업에 관한 법률), a collective investment vehicle or business entity refers to an entity which engages in collective investment activities.

Asset management companies fall within this category. Following legislation of the Indirect Investment Asset Management Business Act (간접투자자산운용업법) in December 2003, asset management companies were newly introduced by means of the integration and revamping of investment trust companies under the Securities Investment Trust Business Act and asset management companies under the Securities Investment Company Act.

Key words
collective investment, asset management, investment trust, corporate-type trust, investment scheme

In the Development Age
The previous securities investment trust system gained its legal ground through the Securities Investment Trust Business Act (증권투자신탁업법), legislated in September 1969. The Korea Investment Corporation, established in December 1968 pursuant to the Furtherance of the Capital Markets Act (자본시장육성법), was the first institution to deal with the securities investment trust business. Since the KIC, as a non-profit organization, focused its efforts on policies designed to support the stock market, its securities investment trust business suffered a serious reversal.

The securities investment trust business came to be carried out on full-scale only after Korea Investment Trust, the country’s first specialized investment trust company, was launched in September 1974. From February 1977, when the Korea Investment Corporation was bisected into the Securities Supervisory Board and Daehan Investment Trust, the securities investment trust business grew with even greater rapidity. After that, Kookmin Investment Trust was set up in July 1982, and five local investment trust companies were established in November 1989. In addition, 23 investment trust management companies, some of them reclassified from investment advisory companies, were newly founded during the period between 1996 and 1997.

Post-IMF Crisis
However, the late 1990s Asian currency crisis resulted in dramatic structural changes to the asset management industry. First of all, two existing investment trust companies exited the field due to failures of management. Among the newly established investment trust management companies, moreover, five companies were liquidated or saw their business licenses revoked. Subsequently, however, backed by a bullish stock market, eleven more investment trust companies were set up during the period from 1998 to 2004.

Investment companies of the nature of corporate-type securities investment trusts were meanwhile introduced with the September 1998 enactment of the Securities Investment Company Act. At the time of the Act’s introduction, existing investment trust management companies were entitled to concurrently conduct corporate-type securities investment trust businesses with authorization from the Minister of Finance and Economy. Until integration of the Securities Investment Company Act into the Indirect Investment Asset Management Business Act in December 2003, the number of asset management companies, established and operated in accordance with the Securities Investment Company Act, stood at 13.

In around 2003, unspecified money trusts of bank trust accounts came into conflict with business handled by investment trust companies. Investment schemes related to indirect investment grew complex, as they were divided into contract-type investment trusts (investment trust companies) and corporate- type investment trusts (securities investment companies). Against this backdrop, the related systems were realigned in that year, to address the growing need for a reasonable adjustment of financial institution systems pertaining to indirect investment.

It became difficult to utilize a variety of investment schemes under the law, as indirect investment schemes were confined to investment trust companies, stock companies and private equity funds (PEFs). There were in addition no protective systems in place for investors in indirect investment schemes not prescribed by law. As a result, under the Capital Markets Act, indirect investment schemes were shifted to collective investment schemes and their scope was expanded to include all organizations established under the Civil Act and the Commercial Act, such as limited liability companies, associations under the Civil Act, and undisclosed associations under the Commercial Act. In terms of assets for investment, in the past they were limited to investment securities, listed and over-the-counter derivatives, real estate and commodities. However, the Capital Markets Act comprehensively redefined them as “assets that are valuable for investment” and also eased the criteria for investment assets by type of collective investment scheme.

A total of 81 collective investment business entities were in operation in Korea as of the end of June, 2011, with total assets of 311.9 trillion won (on the basis of the balance of money entrusted in collective investment schemes).

Investment Trusts
The main business of collective investment business entities is to manage the properties of collective investment schemes set up and established in the forms of investment trusts and investment companies. In terms of the establishment of collective investment schemes, investment trusts issue beneficiary certificates in which they pool funds from groups of investors, invest them in assets including securities, and distribute the accrued benefits to investors. Most domestic collective investment schemes are operated in the form of investment trusts. As of end-2010, the amount consigned to collective investment schemes by investment trusts stood at 302.7 trillion won, accounting for 96.1 percent of the total amount of funds entrusted to them.

The organizational structure of an investment trust consists of a management company which oversees investment trust properties, a trustee company tasked with custody of trust properties, and a selling company which performs the business of selling beneficiary certificates. Collective investment business entities take on the roles of the management companies. Trust companies serve as the trustee companies, and banks and securities companies serve as the selling companies. Collective investment business entities can underwrite securities, excluding stocks, through investment trusts. Accordingly, in the event that collective investment business entities include investment trust properties, stocks must be sold and purchased in the secondary market, while bonds can be underwritten in the primary market and traded in the secondary markets.

An example of a corporate-type collective investment scheme is an investment company which specializes in managing assets including securities and distributing the profits to shareholders. Although the investment company is a corporation subject to the Commercial Act, it is a paper company and prohibited from the establishment of branch offices outside its head offices or the recruitment of employees or full-time executives. This investment company must commission the management, custody, offering and sales of assets and other general administration ― to an asset management company, an asset custody company, a selling company and a general administration company.

Other Related Companies
The asset management company, upon being entrusted by the investment company with management of the assets, actually supervises establishment of the paper company and the offering of stocks.

The asset custody company, upon being commissioned by the investment company to hold the assets, separates the assets of the investment company from its own properties and other trust properties for management. Like with the trustee company in an investment trust, the carrying out of services as an asset custody company is confined to trust companies or financial institutions with the ancillary business scopes of performing trust services.

The selling company, upon being commissioned to do so by the investment company, deals with the offering or sales of stocks, a function mainly carried out by banks, securities companies and insurance companies. The role of general administration company, with the responsibility for duties concerning stock transfer, stock issuance and the operation of securities investment companies, is carried out mainly by the asset management company.

PEFs and Hedge Funds
Meanwhile, a private equity fund (PEF) is an entity designed to pool funds through private placement from a restricted number of investors and generate investment profits through the corporate restructuring of a specific company, including through merger or acquisition. A PEF consists of one or more general partners and one or more limited partners, and its total number of employees can not exceed 49 individuals. From among its general partners, one or more are selected as executive partners with authorities and duties to undertake the businesses of the PEF in accordance with the relevant articles of association.

A private collective investment scheme of eligible investors (termed a hedge fund) is an investment intended to raise funds through private placement from a limited range of professional investors and manage these assets in an aggressive manner. Under the Capital Markets Act, restrictions on the leverage limits and the ceiling on investment in derivatives were eased, enabling more aggressive asset management. The Act imposes the duties of reporting the establishment and leverage of hedge funds and the trading status of derivatives, and also explicitly prescribes the ceilings on leverage. (A hedge fund may leverage up to 400 percent of its total collective investment properties.)

Collective Investment Schemes
Meanwhile, a private equity fund (PEF) is an entity designed to pool Collective investment can be classified into five distinctions, in accordance with the investment assets concerned: securities collective investment schemes (CISs), real estate CISs, special asset CISs, short-term finance CISs (MMFs) and mixed asset CISs.

The assets which collective investment business entities are allowed to manage as properties of collective investment schemes encompass any properties that are valuable for investment, and only the investment ratios of the investment products are restricted. In the case of short-term finance CISs, however, investments are still restricted to those in securities only.

A securities CIS invests an excess of 50 percent of its collective investment properties in securities and derivatives based upon underlying assets consisting of securities. Under Article 240 (2) of the Enforcement Decree of the Capital Markets Act, however, when determining this investment ratio some investments are excluded : for example investments in beneficiary certificates, collective investment securities and asset-backed securities of which 50 percent or more of the respective underlying funds are made up of real estate-related assets and special assets; and investments in stocks issued by real estate and ship investment companies.

A real estate CIS invests: A mixed asset CIS is not subject to the restrictions imposed on securities, real estate and special asset collective investment schemes in managing its collective investment properties. A short-term finance CIS invests the entirety of its collective investment properties in short-term financial instruments, and is managed in a manner as prescribed by Presidential Decree.
 * an excess of 50 percent of its collective investment properties in real estate;
 * derivatives based on underlying assets consisting of real estate;
 * loans to corporations related to real estate development;
 * beneficiary certificates, collective investment securities and asset-backed securities of which 50 percent or more of the respective underlying funds are made up of real estate-related assets and special assets; and
 * stocks issued by real estate investment companies.

Statistics
In terms of the amounts entrusted to CISs by investment asset, as of end-June 2011 securities CISs totaled 225.3 trillion won, accounting for 72.3 percent of the total amount entrusted, and short-term finance CISs 53.8 trillion won, or 17.3 percent of the total. Among securities CISs, stock investments accounted for the lion’s share of their use of the funds entrusted to them, at 32.2 percent, or 100.4 trillion won, despite an ongoing decline since 2009.