In 2014, Korean Air flight 86 was forced to return to the gate at JFK airport after first-class passenger Heather Cho erupted in anger when her welcome snack of macadamia nuts was served in a packet rather than on a plate. Cho’s father happened to be the big boss at Korean Air, and when the incident became public, there was outrage.
Cho eventually served a few months in jail but the incident highlighted the excesses of Korean ‘chaebols’, huge industrial conglomerates controlled by superwealthy families.
These privileged dynasties have for years faced accusations of bribery and corruption.
Driving growth: Giant Korean companies including car maker Hyundai help power profits in the fund WKOF
For canny investors however, their apparent susceptibility to scandal presents an opportunity.
Many Korean companies, quoted on the local stock exchange, have two classes of shares – voting and non-voting. The structure was designed to ensure that founding fathers retained control of their businesses after they were floated and remains prevalent to this day. As compensation, however, nonvoting shares traditionally pay out slightly higher dividends than ordinary stock.
This generosity seems to count for less among investors than the loss of voting rights and the nonvoting assets, known as preference shares, routinely trade at a significant discount to their voting counterparts.
Weiss Korean Opportunity Fund was set up to take advantage of this anomaly. Founded in 2013, the fund has delivered strong returns ever since, significantly outperforming both the local Korean market and stock markets more broadly.
The shares are £2.71, they are listed on AIM and should increase materially over time, paying annual dividends along the way.
The Weiss Korean Opportunity Fund, or WKOF, was created by Andrew Weiss, originally an academic, now Professor Emeritus at Boston University and the boss of Weiss Asset Management, a huge US investment firm.
Weiss and his team began looking at Korea over a decade ago and soon sensed that there was money to be made from the preference share sector.
Today, WKOF is invested in the preference shares of 36 Korean companies, from well-known names such as Hyundai Motor Company and LG Electronics, to lesser-known firms such as CJ CheilJedang, a global food company with a fast-growing sideline in natural animal feed.
All these businesses have one issue in common. Their non-voting shares trade at a significant discount to the voting shares, most recently calculated at more than 50 per cent. In other words, the preference shares are half the price of the ordinaries, while still paying out more in dividends. The massive discount reflects persistent concerns that Korean firms’ autocratic founders have too much power and might abuse it. While examples of such abuse abound, there are clear signs that Korea’s corporate culture is changing for the better.
Once, Korean firms were renowned as poor dividend payers, preferring to keep cash at hand to use on ill-thought-out pet projects, or worse. Today, dividends are growing, suggesting that financial discipline is improving.
Corporate governance is higher up the agenda too, as firms try to put Korea’s scandal-ridden past behind them.
At the same time, Korean companies are at the forefront of some of the fastest-growing areas of business and industry, from sophisticated technology to green energy. South Korea consistently ranks as one of the world’s biggest investors in research and development, an investment that is already paying off in terms of top-range phones, televisions and other gadgets and is likely to generate growth through this decade.
The country also produces many of the world’s lithium-ion batteries, used to power electric vehicles, including Tesla cars.
Yet the South Korean market is cheaper than many other stock markets, when measured by the prices at which shares trade, compared to the earnings they generate. Regional peers, such as Taiwan, India and Japan, are all more expensive than the Korean KOSPI, an index which tracks the country’s listed businesses.
If the Korean market is cheap and the preference shares are half the price of ordinary stock, investors in this sector benefit from a double discount. This is expected to narrow substantially over time and, for certain companies, it already has, allowing WKOF to increase in value consistently year by year.
This performance is widely expected to continue. The Weiss team is deeply experienced, they have a broad network across South Korea and keep a constant eye on generating value for shareholders, including Weiss himself, with a near 8 per cent stake in the business.
Midas verdict: South Korea is a long way away and Korean preference shares may seem rather exotic for some UK shareholders. But several of the world’s best-known businesses hail from Korea, the Weiss Korea Opportunity Fund is determined to prove its mettle and an update later this week should prove encouraging. A long-term buy for the adventurous investor.
Traded on: AIM Ticker: WKOF Contact: weisskoreaopportunityfund.com or 001 617 7787780