Acumen Wealth Advisors manages our clients’ portfolio risk with prudent investment selection, due diligence, tactical asset allocation, and diversification. With our commitment to maintaining transparency and the highest standard of fiduciary responsibility, we conduct ongoing due diligence meetings of our money managers’ investment and operational practices. We believe continued research helps capitalize on opportunities to discuss the money managers’ market outlook and insight into how this outlook impacts the positioning of client portfolios.
Our team held an onsite due diligence meeting on June 6, 2018 at Lazard Asset Management in Seoul, Korea.
Attending members from Acumen Wealth Advisors included:
Attending members from Lazard Asset Management included:
In preparation for the meeting, Acumen Wealth Advisors addressed two topics:
How does Lazard collaborate and share information among the global offices?
What are unique investment opportunities, hurdles, and the economic outlook for South Korea?
Acumen Wealth Advisors utilizes Lazard Investment Management’s International Select ADR strategy for international exposure in select portfolios. Lazard International Equity Select ADR seeks to generate strong relative returns over a full market cycle by investing in companies with strong and/or improving financial productivity at attractive valuations. The strategy typically invests in 40 to 60 US-listed securities of non-US developed-market companies with a market capitalization generally of $5 billion or greater. The benchmark for this fund is the MSCI EAFE Index (Lazard, 1Q18 Factsheet, 2018). Lazard Investment Management utilizes dedicated in-house research with over 250 investment professionals, including those with focused industry experience and those dedicated to specific teams (Lazard, Lazard Korean Equity Capabilities, 2018, pg. 8). The Seoul team’s primary role is to manage the core equity strategy and to act as on-site analysts for EM equity, EM core, and EM small cap. With 45 global investment personnel working within the Emerging Markets platform, a high level of research synergy must exist between Lazard’s global EM analysts and the Seoul team who provide skill and research. Specialist teams in Asia, Europe, and the United States manage assets locally and leverage their knowledge into global and multi-regional portfolios which can then be integrated in global research and portfolios (Lazard, Lazard Korean Equity Capabilities, 2018, pg. 6). Lazard utilizes an internal SNS (Simple Notification System) to collaborate with other offices on a real-time level.
South Korea was one of the fastest growing markets from 1980 to 2010 due to substantial progress and influence in the global consumer electric market, automobile space, and petrochemical industry. Then, in 2011, the Korean economy entered the latter stages of its economic cycle which resulted in low growth coupled with high labor costs. Large cap companies found little room for growth opportunities and exporters were stuck in between the rapid growth of emerging market countries and well-developed countries that already had an established presence in the global markets. Korean large cap exporters began to lose traction and shares in the global markets and corporate earnings of listed companies remained relatively flat from 2010 to 2016. In 2017, the Korean economy saw a breakthrough triggered by both political and corporate reform (Lazard, Memory of Korea, 2018, pg 1).
One area of unique investment opportunity for South Korea is memory chips. Memory chips and supply chains account for roughly 40% of the South Korean market. One of the major drivers of the increase in earnings can be attributed to dynamic random-access memory (DRAM) which is a type of semiconductor memory chip. DRAM had mainly been used for PCs and mobile phones and in 2013, PC and mobile phones accounted for 34.5% and 31.3% respectively of global DRAM demand. Recently, as a result of greater demand for server memory due to heavy global utilization of cloud architecture, server DRAM demand has surpassed PC DRAM demand and 2017 expectation was 15.6% for PCs, 42.4% for mobiles, 28.2% for servers, and 5.7% for graphics. Despite the substantial demand increase, DRAM makers are increasing supply in a disciplined and conservative manner due to being challenged by future technology migration and being satisfied with current profitability (Lazard, Memory of Korea, 2018, pg 2). One exciting area of technological development which will increase future demand for memory chips is autonomous driving. While a cellphone may require 64GB of memory for operating capacity, 64MB accounts for roughly 1/10 of the minimum required memory for an autonomous driving vehicle system. The top three companies in the world for memory chips (Samsung, Hynix, and Micron) account for 95% of the market share; Samsung and Hynix are both South Korean companies (Lazard, Memory of Korea, 2018, pg 2). Investors expect the current boom in the DRAM market to be sustained further.
Even with the current boom in DRAM technology, the outlook for NAND flash memory is even brighter. NAND flash memory, in the form of solid state drivers (SSDs) is a type of data storage device that competes with hard disk drivers (HDD). While HDDs generally offer greater recording capacity, a better price per unit of storage, and a longer product lifetime, SSDs are faster, generally more durable, and consumer less power. The advent, development, and adoption of high-density 3D NAND products has shifted the dynamics of the HDD vs SSD battle. With increasing capacity, wider 3D NAND availability will continue to drive SSD adoption due to performance and TCO (Total Cost of Ownership) benefits. DRAMeXchange, one of the forefront research authorities on DRAM and NAND Flash since its inception in 2000, forecasts global NAND flash consumption to grow from 36.1% in 2017 to 37.4% in 2018 and 51.4% in 2019 (Lazard, Memory of Korea, 2018, pg 3).
Korea has historically represented a relatively cheap outlet for its market capitalization making it one of the broadest yet cheapest hubs in the EM sector.
One influence in the market presenting a hurdle from an ESG (Environmental, Social, and Governance) Criteria is “chaebol”, a concept and term equivalent to nepotism or conglomerate. “Chaebol” is a concept found in every country but what makes it exponentially more of an issue with South Korea is that the market grew too fast without regulations in place or created equal to the rate of growth. The strict hierarchical and paternalistic nature of Korean culture coupled with the absence of laws in place to help govern the market and corporate deals, lead to an abundance of improper wealth transfers and inheritance in chaebol families. The most recent scandal involving former president Park Gun-hye and her friend Choi Sun-sil was one of the largest scandals in Korean history but served as a catalyst for much needed and drastic changes in domestic investment policies and corporate governance. The new administration under President Moon Jae-in has made chaebol reform one of the central items in its economic agenda. Though details are still unclear, it is believed his strategy for sustainable reform will focus on disciplined execution of regulations on the largest chaebols and to induce corporate governance improvement through a leveling of the right of other stakeholders in the market (Lazard, Memory of Korea, 2018, pg 4).
A geopolitical concern existing for South Korea is the North Korean nuclear threat. Although North Korea has posed a threat from a nuclear standpoint since 2006, there has been greater concern and attention being drawn to North Korea’s nuclear program as of late due to increased nuclear capabilities and testing. Although there was edgy dialogue exchanged between President Trump and Kim Jong Un in early 2018, North Korea has made great strides in both diplomatic talks as well as denuclearization with both the U.S and South Korea. North Korea entered into the Panmunjom Declaration with South Korea on April 27th, 2018, which was an agreement to denuclearize the Korean Peninsula and to declare an official end to the Korean War within the year. This concrete display of peace efforts between North and South Korea eases tensions and helps mitigate the uncertainty and instability that a direct geopolitical concern caused in the South Korean economy. The Korea Composite Stock Price Index (KOSPI) has been moving positively along with the reunification/peace efforts, with the infrastructure space, in particular, moving in correlation.
If reunification were to happen, it is anticipated that Korean consumer-oriented companies would have a fresh market to approach rather than attempting to stake its place in established Asian markets such as Japan or China. Lazard believes long-term investors will increasingly seek exposure to Korean equities which may potentially benefit from a unified Korea.
Lazard Asset Management, “Lazard International Equity Select ADR – SMA 1Q18 Facsheet”, 2018. Retrieved July 5th, 2018 (http://www.lazardnet.com/wm/docs/sp0/6310/LazardInternationalEquitySelectADR-SMA_FactSheet_2018Q1_en.pdf?pagename=All+Investment+Strategies).
Lazard Asset Management, “Lazard Korean Equity Capabilities Mar 2018”, 2018. Presented at June 6th, 2018 Due Diligence Meeting with Acumen Wealth Advisors.
Lazard Asset Management, “Memory of Korea”, 2018. Presented at June 6th, 2018 Due Diligence Meeting with Acumen Wealth Advisors.