FLKR: Keeping The Faith In Korea's Value Unlocking Story

seekingalpha05-01

Korea’s ‘value-up’ efforts may have suffered an election setback.But there’s still plenty of room for this value unlocking story to unfold over time.Ultra-low-cost FLKR remains a great vehicle for ...

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Torsten Asmus/iStock via Getty ImagesSouth Korea’s parliamentary election is done and dusted; for President Yoon Suk-Yeol’s incumbent government, the outcome was less than favorable, as his ruling ‘People Power Party’ lost out to the opposition Minjoo Party by a bigger margin than expected. At first blush, this result isn’t ideal, as it limits the government’s ability to push through more contentious policy proposals, particularly on the fiscal front. Markets similarly took a dim view of this legislative split, as evidenced by the post-election drawdown in Korean stocks. Data by YChartsTo some extent, this pessimism makes sense, given the government will now be handicapped on market-friendly fiscal incentives. Think, for instance, plans to repeal capital gains taxes (to be implemented next year), as well as on potential ‘value-up’ program tax breaks (see pre-election press release citing “tax support” here). Yet, it’s worth keeping in mind that the overarching ‘value-up’ goal to improve shareholder returns and governance is also shared by the opposition party (albeit with more of a focus on minority shareholder protection). And perhaps even more importantly, the initiative has public support and a vote of approval from the market. BloombergIn the meantime, Korean large-caps continue to trail their global peers on capital allocation, with a notable disparity between their excess net cash balances and low returns on equity. Given the size of the unlocking opportunity, even a scenario where ‘value-up’ takes a bit longer and offers fewer ‘carrots’ than the market expects could still yield quite a bit of mid to long-term upside. In line with my prior note (see FLKR: Korea Could Be This Year's Sleeper Hit As 'Value Up' Catalyst Looms), playing the ‘value-up’ theme via ultra-low-fee Franklin FTSE South Korea ETF (NYSEARCA:FLKR), currently on offer at a discount to book, remains a compelling option. Data by YChartsFLKR Overview – Still the Go-to Option for Fee-Sensitive Investors Franklin Templeton’s FTSE South Korea ETF remains the cheapest of the Korean passive vehicles listed in the US with an intact 0.1% expense ratio. By comparison, iShares’ MSCI South Korea ETF (EWY) and the actively managed Korea Fund (KF) charge ~0.6% and ~1.5%, respectively. Franklin TempletonFLKR has also seen its managed assets grow to $284m this quarter, though the fund remains well behind passive comparable EWY (up to $5.0bn). This means spreads are still wider for FLKR (26bps 30-day median vs. 2bps for EWY), though Franklin’s industry-low fees continue to offset this liquidity gap. Franklin TempletonThe rest of FLKR’s fundamentals also remain intact, including its relatively diversified profile – a result of the fund tracking a ‘capped’ large-cap Korea index that imposes concentration limits. Franklin TempletonFLKR Portfolio – Broader but More Tech-Heavy Than Before In addition to cost, FLKR continues to differentiate itself with a broader and more diversified portfolio than its passive [EWY)] and active [KF] peers. Still, there’s no escaping the tech concentration – per its latest sector breakdown, FLKR has a higher 35.4% allocated to Information Technology. In contrast, the fund also now has lower exposures to Industrials (15.4%), Financials (12.7%), and Consumer Discretionary (11.5%). While the makeup is in line with key comparable EWY, FLKR’s stricter weightage caps keep the percentage allocations better spread out. Franklin TempletonAs for the single-stock breakdown, both of Korea’s ‘big tech’ names, Samsung Electronics (OTCPK:SSNLF) and SK Hynix (HXSCF), continue to stand out. With stakes in both the common (18.4%) and preferred shares (2.7%), Samsung remains by far the largest fund holding. Meanwhile, the SK Hynix allocation has also been on the rise, helped by the stock’s recent outperformance. Outside of Samsung/Hynix, the rest of FLKR’s portfolio maintains a skew toward blue-chip franchises like Kia (KIMTF) and Hyundai Motor (OTCPK:HYMTF), as well as steelmaker POSCO (PKX). Franklin TempletonThe most notable change this quarter, on the other hand, is FLKR’s relative overweight to Celltrion (OTCPK:CONIF), a biopharmaceutical company that trades at a far richer multiple than the rest of FLKR’s portfolio. Importantly, though, FLKR’s relatively high exposure to stocks priced at deep book value discounts keep the overall portfolio priced at <1x P/Book. This also means FLKR retains its relative valuation discount to comparable funds like EWY, in turn, keeping the fund in pole position to benefit from Korea’s corporate ‘value up’ theme. Franklin TempletonFLKR Performance – Look Past the Post-Election Setback Last year was a particularly good year for FLKR, with the fund delivering a total return of +20.0% in NAV terms (+19.2% market price terms). While some of the momentum has carried through to this year, the combination of a less market-friendly parliamentary election outcome and rising risk of ‘higher for longer’ interest rates have led to the fund reversing its year-to-date gains. Zooming out, FLKR has also compounded at only +0.6% annualized since inception – hardly impressive, given the added risks associated with investing in Korea. Franklin TempletonThat said, FLKR’s relative performance vs comparables has been commendable. Over the last five years, for instance, FLKR (+4.2%) has outpaced EWY (+3.8%), helped by its industry-leading fee structure and diversification. And while the fund has trailed market-beating KF (+5.1%) by less than one percentage point over a similar five-year period, it has notably outperformed over shorter one and three-year timelines. Last but not least, FLKR’s ability to closely track its benchmark FTSE South Korea Capped Index stands out in a market where accessibility is an issue and transaction costs tend to be on the high side for foreign capital. Franklin TempletonAs for fund distributions, FLKR doesn’t stand out as a particularly high yielder, though its low-single-digit payout is still fairly solid. Where the ETF stands out, though, is its portfolio valuation, which by virtue of its stricter concentration limits, remains slightly below book. Given Korea is pushing ahead with a corporate ‘value up’ program specifically focused on addressing stocks with P/B under 1x, and subpar governance and capital returns, FLKR is well-placed to benefit. If Japan’s success is anything to go by, the upside potential from these reforms, which address very similar corporate issues (e.g., excess cash balances and low capital efficiency) could be quite substantial. JPMorganThe good news is that at current levels, the market isn't pricing in too much ‘value up’ upside and thus, investors aren’t paying very much at all for the optionality. Plus, Korean stocks have plenty to offer on the earnings front, with large caps currently estimated to deliver the highest growth rates in Asia (+78%/+28% in 2024/2025), helped by their exposure to growth themes like artificial intelligence (Samsung/Hynix) and EV batteries (Samsung SDI), among others. While there's also cyclicality embedded in this growth, FLKR’s low-teens earnings multiple seems undemanding either way. JPMorganKeeping the Faith in Korea’s Value Unlocking Story  Korean stocks may be down post-election, but they certainly aren’t out. While President Yoon’s ‘value-up’ push won’t come as easily near-term, the quest to unwind the ‘Korea discount’ is very much a bipartisan one - even if both parties have different methods of achieving the same goal. Thus, mid to long-term investors willing to stick it out stand to be well-rewarded should we see a ‘Japan 2.0’ situation play out here. Korea’s near-term earnings growth also continues to receive little credit, despite its high-double-digit pace for 2024 ranking right at the top in Asia. Ahead of key ‘value-up’ catalysts scheduled for later this year (e.g., new indices and ETFs), I remain quite upbeat about ultra-low-cost FLKR’s prospects.","kind":null,"is_publish_news":null,"is_publish_highlight":null,"is_publish_live":null,"is_publish_wemedia":null,"editions":null,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.22.4","shortVersion":"4.22.4","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2432130061"}