Korean preference shares

But Korea has various differences to the UK stock market that I need to be aware of as an investor. Some could trip me up — but others may offer me an opportunity.

For example, many of today’s big Korean companies like Samsung had founding families that wanted to raise money but also keep control. To do this, they issued non-voting preference shares. These shares often trade at a discount to voting shares.

But in recent years, some companies have been trying to simplify their capital structure. That means they have been cancelling the non-voting preference shares. To do that they have paid owners the price of an ordinary share. Some savvy investors have bought up these preference shares in anticipation of a possible payout thanks to a deep discount compared to the price of ordinary shares in the same company. One thing I like about this strategy is that these shares are often in quality companies. So they could turn out to be rewarding investments even if the company does not decide to change its share structure and cancel them.

Hyundai

An example of this in practice is Hyundai. The company is a household name across many markets. It is hoping to benefit from the global growth in electric vehicles.

But Hyundai has three types of preference shares outstanding. They all trade at a deep discount to the price of ordinary shares.

If I bought such shares, I could hopefully benefit from Hyundai’s business performance. But I might also get a windfall if Hyundai decides to cancel the shares and pays me the higher value of an ordinary share.

Digging around Asian shares

That might sound unlikely. But actually lots of companies, including Samsung, have done just that.

That is why the Weiss Korea Opportunities Fund (LSE: WKOF) has been buying up bucketloads of such Korean preference shares. The fund managers have followed the same strategy before in markets that had unusual share structures, such as Italy and Brazil. Their attention is now on Asian shares, specifically in Korea. Hyundai is currently the fund’s biggest holding, alongside companies including LG Chem and LG Electronics.

Like the KOSPI index, the fund has had a disappointing year, with its share price falling 29%. The dividend yield of 3.3% is attractive to me. I also like the long-term strategy of exploiting the price difference between ordinary and preference shares in leading Korean companies. If that is successful, it could help my investment returns. So I would consider owning Weiss Korea Opportunity Fund shares as a way of exposing my portfolio to an unusual opportunity among Asian shares.