South Korea Upgraded To Developed Markets Status

After throwing fund managers a curve last year, index provider FTSE Group on Wednesday evening decided to upgrade South Korea from emerging market to developed market status.

London-based FTSE, which runs more than 100,000 indexes representing 48-plus countries, had been expected in 2007 to promote South Korea from an emerging market by many money managers. Two other major index providers, Dow Jones & Co. and Wilshire Associates, already classify South Korea as a developed market.

By some estimates, moving a country between emerging and developed categories in FTSE indexes can cause an asset shift of anywhere from $10 billion to $25 billion by passive index managers around the world. FTSE says more than $2 trillion is tied to its benchmarks by index funds tracking its benchmarks.

"Last year, there were all kinds of expectations about movements," said Jerry Moskowitz, managing director of FTSE Americas. "But we don't just blindly put together a set of criteria and check off the boxes."

He added: "We realize there's a lot of potential for significant movements in money by managers benchmarked to the various indexes."

Although FTSE did move Israel up from advanced emerging markets to developed markets status in 2007, many managers openly groused that the huge indexing group was being too conservative. In fact, some funds say they've already been planning ahead for South Korea's promotion in their various institutional and private accounts tied to FTSE benchmarks.

Besides South Korea, another often-mentioned candidate for upgrading has been Taiwan. Last year, the FTSE committee found that both countries still had issues related to regulations blocking foreign investments. And members in 2007 pointed to a need for both countries to set up more uniformed rules for short-sellers and other settlement issues related to foreign investors making after-hour trades.

"These were technical issues and not significant fundamental concerns," Moskowitz recalled on Wednesday.

While members, led by committee chairman Steven Schoenfeld of Northern Trust, apparently felt South Korea had made enough infrastructure improvements, Taiwan will stay on FTSE's watch list. That means it could be upgraded in September 2009.

Regardless of the timing of the upgrade, South Korea now figures to become a little fish in much bigger ponds.

As it stands now, the country is one of the largest constituents in most emerging markets benchmarks. But the 12-month process isn't expected to be completed until next year.

In the rapidly growing exchange-traded funds marketplace, which is dominated by index-based products, South Korea stands as a leading component. For example, in the $6.9 billion Vanguard Emerging Markets ETF (AMEX: VWO), South Korea comprised 12.1% of the underlying Morgan Stanley index entering September. The only countries with bigger weightings were China (12.4%) and Brazil (16.5%).

The same pattern holds true for the $20.3 billion iShares MSCI Emerging Markets Index (NYSE: EEM), which had 12.27% in South Korea.

In addition to categorizing markets by developed and emerging, FTSE publishes watch lists of countries that might be considered for promotions or demotions among indexes at its next annual reclassification. Along those lines, the index provider says that:

Following the introduction of the FTSE Frontier Markets Indices earlier in 2008, a watch list will be extended to include Frontier Markets. Kazakhstan, Malta and Ukraine will be added to that list for possible inclusion as Frontier status next year.

Also, Pakistan will no longer be considered for possible demotion from secondary emerging to Frontier status.

"These changes are getting so much attention that we're going to start doing semiannual reviews to communicate with people," said Moskowitz. "That will help to complement the work of our country classification committee, which meets every quarter."