South Korea’s secondary Kosdaq bourse mainly consisting of shares of small- and medium-sized firms has been underperforming the nation’s main Kospi market since the country’s biggest institutional investor National Pension Service (NPS) early this year decided to up its investment in index funds for stable returns over the long run, according sources from the industry on Wednesday.

The Kospi rose 0.92 percent in the recent month, buoyed by sharp gains in shares of Samsung Electronics Co. and Naver Corp., whereas the secondary Kosdaq fell 6.02 percent during the same period, becoming one of the worst performing indices along with Venezuela’s market index among the world’s 40 major stock indices.

Entering this year, NPS announced that it would include more index funds, such as the Kospi 200 and Kosdaq 150 index with large-cap stocks, in its equity portfolios to improve the return rate, at the expense of small- and mid-cap value individual shares that it had actively invested in the previous years. In accordance with the decision, the pension operator in June ordered its fund managers to up index fund trading. Other institutional investors followed suit, selling off their small- and mid-cap stocks that are not included in the major indices. Market experts blamed the NPS’s recent shift to trading index funds for a downward spiral in the Kosdaq that mainly consists of small- and mid-cap stocks.

The average return on small- and mid-cap stock funds logged -7.86 percent, falling to the lowest level among all stock funds at home and abroad. So far this year, 190 billion won ($169 million) worth of funds comprised of small and mid-cap shares has been sold off, a stark contrast to the last two consecutive years when investors picked up about 2 trillion won worth of small- and mid-cap stocks.

The recent downward spiral in small- and medium-cap stocks has led small- and mid-sized businesses to delay or cancel their initial public offerings on the tech-heavy secondary Kosdaq market. During the first half of last year when demand for small- and mid-cap stocks was strong, 43 companies went public in the Kosdaq market, but that number of IPOs in the secondary stock exchange was slashed to 24 over the same period this year.

“We decided to push back our company’s IPO schedule to sometime after next year as we expected that it would be difficult to list our stocks at a fair price when the market is slow,” said a small biotech company executive who asked to be unnamed.

NPS, however, said its decision to increase allocations of index funds in its equity investment should not be blamed for the recent underperformance of small- and mid-cap stocks as it has also upped its direct investment in small and medium company stocks.

By Kim Hye-soon and Yong Hwan-jin

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