The Korea Fund, Inc. Annual Report 1 the Korea Fund, Inc
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June 30, 2021 This report contains the following two documents: • Chairman’s Letter to Stockholders • Annual Report to Stockholders—June 30, 2021 The Korea Fund, Inc. Chairman’s Letter to Stockholders Dear Fellow Stockholders We have much pleasure in providing the Annual Report of The Korea Fund Inc. (the “Fund”) covering its full fiscal year, that is from July 1st 2020 to June 30th 2021, otherwise referred to herein as the “Period”. The Stock Market and Fund Performance This Period has provided investors in the South Korean equity markets exceptional opportunities. As mentioned in my February Letter with the Half Year Report the Korean stock market came to life following the sharp global market falls on the back of the COVID-19 global pandemic in 1Q20. Asian markets, particularly those of China and South Korea on the back of each’s rapid response to the pandemic, showed greater resilience with lesser economic slowdowns to their Western counterparts and rapidly assumed the leadership in the subsequent economic and market recoveries. In Korea this was provided as much through the country’s development of ‘new economies’, as well as a large government stimulus package. Further I referred at that time to the then-recent development of a Covid vaccine which has clearly done much to slow the problem, particularly in the more advanced economies. Translating this into stock market returns through the full fiscal Period, your Fund has provided stockholders an increase in Net Asset Value (“NAV”) of 76.9% – broken between its first and second half-year periods by 53.2% and 15.5% respectively. This NAV return to stockholders through its full fiscal year compares with a 66.5% increase in our benchmark, the MSCI 25/50, thereby providing stockholders an excess return or positive alpha of 10.4%. Further, through the Period the stock price increased 80.7% reflecting a marginal narrowing of the share price discount relative to its NAV. These investment returns place your Fund in the first quartile of our consultant’s peer group, made up of 13 funds and indices covering the South Korean market, over all periods up to and including 5 years and in the second quartile in the 10-year period. Investment Manager Transition The transition to our newly appointed Investment Adviser, JPMorgan Asset Management (Asia Pacific), progressed most satisfactorily on January 1st 2021, thanks to the strong support of both the retiring and incoming managers as well as your Board of Directors. JPMorgan is maintaining a bottom-up investment approach with a contrarian philosophy within a long-term time horizon yet with sensitivity to valuations, growth prospects and earnings’ quality. The Report of our Investment Adviser follows and whilst it does not under estimate the threats of the pandemic it provides a degree of optimism in its outlook on the back of both above trend – and The Korea Fund, Inc. Chairman’s Letter to Stockholders (continued) even accelerating growth for the coming period, continued supportive fiscal and monetary policies as well as an improving semiconductor cycle. Share Discount to NAV Through the adviser transition your Board has constantly monitored the Fund’s share price relative to NAV which through the Period has traded in a range of 17.0 to 12.6 percent. With the transition behind us your Board will look to prevent the discount reaching excess levels. Expenses Your Board continues to closely monitor expenses and is encouraged that the total expense ratio is presently running at very marginally over 1 percent, albeit having been aided by the increased meetings held by virtual means. Board Diversity As the above paragraph demonstrates since my appointment as your Chairman, I have endeavoured to lead the Fund in a prudent manner. As part of this strategy, we have maintained a small Board of Directors but not at the expense of experience: indeed, your present Board has well in excess of 100 years combined experience across front, middle and back office procedures in both the domestic US and international markets making it, possibly, one of the most experienced within the investment company’s space. I am well aware, and fully supportive of the worldwide move towards increased board diversification and so in this regard we are proposing expanding the Board by one member. Madam Hu Yan has almost 40 years’ experience within the global financial services industry having worked across Northern Asia – particularly China and South Korea, and North America – in the US and Canada, with the major international financial services groups as well as the Chaebols of South Korea. Based between Beijing and Vancouver I believe Madam Hu will provide valuable further diversification of your Board and I trust that stockholders will support this proposal together with the reappointment of the chair of our Audit Committee, Rich Silver. I thank all stockholders for their support through the Period and wish you continued prosperity and safety from the global pandemic. Yours very sincerely Julian Reid For and on behalf of The Korea Fund Inc. July 28, 2021 (THIS PAGE INTENTIONALLY LEFT BLANK) Annual Report June 30, 2021 Annual Report June 30, 2021 Table of Contents 1-4 Investment Adviser’s Report 5-6 Performance & Statistics 7-10 Schedule of Investments 11 Statement of Assets and Liabilities 12 Statement of Operations 13 Statement of Changes in Net Assets 14 Financial Highlights 15-20 Notes to Financial Statements 21 Report of Independent Registered Public Accounting Firm 22-24 Additional Information Regarding the Fund 25 Tax Information/Stockholder Meeting Results/Changes to the Board of Directors/Proxy Voting Policies & Procedures 26-27 Privacy Policy 28-29 Dividend Reinvestment and Cash Purchase Plan 30 Board of Directors 31 Fund Officers The Korea Fund, Inc. Investment Adviser’s Report June 30, 2021 (unaudited) Overview In the 12 months to June 30, 2021, the total return of the Korea Fund, Inc.’s Net Asset Value (NAV) was 76.9% in USD terms, outperforming the MSCI Korea 25/50 Index (Total Return) by 10.4%. The KOSPI index rose 56% during the fiscal year from July 1, 2020 to June 30, 2021 to finish at 3296.68. In USD terms, the index rose 67% as the Won strengthened along with the global economic recovery. During the fiscal year, retail investors bought W70Tn (USD 62Bn) of KOSPI listed stocks – more than offsetting sell pressures from both local and foreign institutional investors who sold W51Tn and W17Tn, respectively. The government announced Korea’s own “New Deal” – W160Tn ($130Bn) investment program set to run through 2025 to create 1.9 million new jobs. The government’s portion of this investment plan is W114Tn. The New Deal is broken down to 1) Digital New Deal: W58.2Tn investment – on data, network, AI, digital education, support “un-tact” businesses, and SOC digitalization; 2) Green New Deal: W73.4Tn investment – on green infrastructure, green growth (low/no carbon energy), and green environment; and 3) enlargement of the social safety net: W28.4Tn support for job transition, creation, and re-education. Korea’s National Assembly passed the Fair Economy Three Laws in December. These laws are designed to improve corporate governance by 1) tightening regulations on inter-group transactions involving family owned companies; 2) limiting influence (voting rights) of the controlling shareholder on election of audit committee members and 3) increase accountability of (ease legal action against) listed companies for wrongdoings of its unlisted subsidiaries. During 2Q21, the Bank of Korea materially raised 2021 GDP growth to 4% vs. previous 3% and CPI to 1.8% vs. previous 1.3%. Governor Lee commented that the Bank of Korea would maintain the accommodative stance “for a while” but went on to state that there is a need to normalize extraordinary measures in line with the economic recovery. Previous thinking was that the policy rate would be raised sometime in the middle of 2022. The latest upward revision for GDP/Inflation has pulled forward the rate hike expectation to 2H21. Discussion of Fund Performance July 1 to December 31, 2020 (Provided by Allianz Global Investors U.S. LLC) The Fund’s overweight position in Hyundai Motors, a global auto manufacturer, contributed positively to performance. The strong sales performance of its luxury brand, Genesis, led to an improvement in operating margins despite the headwinds from declining volumes caused by COVID-19. In addition, increasing footprint in the European EV markets contributed to an 06.30.21 | The Korea Fund, Inc. Annual Report 1 The Korea Fund, Inc. Investment Adviser’s Report June 30, 2021 (unaudited) (continued) appreciation in Hyundai Motors’ share price. The Fund’s overweight position in Kumho Petrochemical, a maker of downstream chemical products, also helped our performance. The ongoing COVID-19 pandemic resulted in strong demand for latex, while input costs remained favorable as a result of low crude oil prices, leading to very strong margins. Lastly, the Fund’s performance was helped by an overweight position in Hyundai Glovis, a captive logistics company for Hyundai Motor group. The company’s share price rebounded on prospects of volume recovery for Hyundai Motor and Kia Motors. Negative contributors over the reporting period include AfreecaTV, an e-sports live streaming platform. The company’s share price underperformed as continuing strict social distancing measures in Korea resulted in forced shutdown of its offline PC Café network. Also, the Fund’s overweight position in Seoul Viosys, a LED chip producer, detracted from performance. The company’s share price corrected on delayed adoption of its UV LED chips by home appliance manufacturers and news of COVID-19 vaccine developments. The Fund’s overweight position in CJ Logistics, a logistics service provider, also contributed negatively to our performance.