Active exchange-traded funds (ETFs) are facing increasing delistings from the market due to failures in managing correlation coefficients. Following a similar incident at Korea Investment Trust Management, Timefolio Asset Management has seen one of its products delisted for failing to maintain a correlation coefficient above a certain level with its benchmark index.
According to the financial investment industry on August 24, Kim Nam-ho, head of Timefolio's ETF management division, has been responsible for all 19 ETFs managed by Timefolio until the end of last month. Among these, nine products, including the recently delisted 'TIME U.S. Dividend Dow Jones Active,' were under his direct management.
Despite a recent organizational restructuring at the beginning of this month, Kim continues to oversee six key ETFs, including 'TIME KOSDAQ Active,' 'TIME China AI Tech Active,' 'TIME Global AI Active,' 'TIME Korea Plus Dividend Active,' and 'TIME U.S. Nasdaq 100 Active.'
In smaller asset management firms, it is common for a single manager to oversee multiple products. However, industry experts argue that the fact that the manager responsible for the problematic product has broadly managed the entire ETF portfolio raises questions about the adequacy of the management and internal control systems.
Large asset management firms typically delineate responsibilities among managers to enhance expertise and management efficiency. For instance, dividend-focused products are managed by those specializing in dividend and value stocks, while technology-focused products are overseen by managers with expertise in growth and tech stocks. In contrast, Timefolio has a structure where one manager oversees a wide range of products, from dividend stocks to Nasdaq 100, KOSDAQ, and AI and semiconductor-related products.
Regarding the recent delisting, Timefolio Asset Management stated that despite achieving higher returns than the benchmark index, the product was removed due to correlation coefficient regulations. However, industry insiders argue that it is insufficient to assess management adequacy based solely on periods of outperformance against the benchmark. In fact, the TIME U.S. Dividend Dow Jones Active underperformed its benchmark for about six months, from mid-November last year to early May this year.
Moreover, the product's management strategy significantly diverged from the benchmark index. The TIME U.S. Dividend Dow Jones Active is designed to select high-dividend stocks based on the U.S. dividend stock index 'SCHD' and pursue excess returns. However, its actual portfolio included less relevant tech stocks. This suggests that the pursuit of higher returns may have led to a management strategy that strayed too far from the benchmark, resulting in a failure to meet the correlation coefficient requirement.
One industry insider noted, "Unlike passive funds that simply track a benchmark, active funds must generate excess returns, making management capabilities crucial. In a market with a strong focus on domestic semiconductors, as seen in the first half of this year, managing these funds becomes challenging, and achieving excess returns over the long term is difficult."
The effectiveness of internal controls during the correlation coefficient management process is also under scrutiny. Active ETFs must maintain a correlation coefficient of 0.7 or higher with their benchmark, and if they fall below this threshold for more than three months, they face delisting.
Some experts suggest that issues should be identified from the product development stage. If the gap between the benchmark and the actual management strategy is too wide, it raises questions not only about management practices but also about the adequacy of the initial product design and index selection process.
One asset management industry representative stated, "Even if a manager deviates from the correlation coefficient standards, there should be a compliance organization in place to manage this. It appears that proper double-checking was not conducted. We need to assess whether there was a system in place to continuously monitor the correlation coefficient and make adjustments when anomalies occurred."
Delistings due to failures in managing correlation coefficients for active ETFs have been recurring this year. In July, four products from Korea Investment Trust Management, including 'ACE TDF 2030 Active,' 'ACE TDF 2050 Active,' 'ACE TDF Long-term Asset Allocation Active,' and 'ACE Apple Value Chain Active,' were delisted for similar reasons. Following this, Timefolio's TIME U.S. Dividend Dow Jones Active was also removed from the market on August 19.
* This article has been translated by AI.
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