By Andrew Wood, Financial Times
Published: Jan 21, 2008
http://search.ft.com/ftArticle?ct=0&id=080121000025

North Korea presents a big challenge for fund managers: how to invest in the world’s longest surviving Communist state? To many people, it is a bellicose, isolated Stalinist basket case. To a handful of investors, it is one of the purest, and perhaps most challenging, frontier markets on the planet.

There is, of course, no stock market, and the country issues no sovereign bonds after reneging on its debt more than 25 years ago. Even people who successfully did business with the Eastern Bloc in the years before and during glasnost and perestroika seem daunted.

Even the Communist party in North Korea’s traditional best friend, China, has abandoned socialist state-ownership and economic control. But North Korea has extended Marxism into a philosophy of juche or self-sufficiency, under its ‘Dear Leader’ Kim Jong-il that has spurned contact with foreigners.

Millions of people have died in the past two decades because of famine, and western observers often suggest North Korea’s economy is close to collapse. The CIA estimates that annual economic output is just $1,800 (£918, €1,227)per person, compared with $24,500 in neighbouring South Korea, which followed a very different economic path after the Korean War of the 1950s that divided the peninsula. The country is further isolated by its reputation for counterfeiting currency, smuggling drugs and building missiles and nuclear devices.

“North Korea is still on the scope of many anti-terrorism watch-lists and it’s not possible to trade with it as though it were a normal country,” says Hank Morris, director of corporate financial advisory services at the consultants IRC in Seoul, the capital of South Korea.

“US citizens are forbidden to trade with North Korea in all but a handful of things, such as magnesite. Given the complexity of the situation, virtually all the trade is with China and Russia, as they share common borders with North Korea.”

However, a few western funds are either investing or preparing to invest in North Korea.

The Chosun Development & Investment Fund, based in London, started subscriptions after receiving approval from the UK regulators in 2006. (Chosun is one of the Korean names for the country.) It is looking to raise at least $50m (£25m, €34m) to invest in North Korea and help the country “develop its legitimate economic activities along internationally accepted lines and also provide an attractive return to investors”.

The fund’s team includes Lynn Turk, who formerly co-ordinated North Korean matters for the US State Department. He also led the first US diplomatic delegation to Pyongyang in 1994.

Another London-based manager that specialises in emerging markets, Fabien Pictet & Partners, is planning a fund to invest in joint ventures in North Korea. Its Three Kingdoms Korea hedge fund already has some investments in South Korean companies that do business with the North – although that is not the main focus of the fund. Progress is slow. “I think we won’t have much to say about the fund until we are clear on the denuclearisation issue,” says Richard Yarlott, Fabien Pictet’s chief executive officer for Asia, last week.

He would not comment on which business sectors the fund might focus on. But other investors in North Korea say there are plenty of opportunities, but it is best to think small.

“You are talking about projects that would be around a million or even a few hundred thousand dollars to make work,” says Ken Frost, finance director of Phoenix Commercial Ventures, which runs several joint ventures in North Korea.

“If you want to rebuild the electricity grid, then that’s going to take billions. But if you want to reanimate a coal mine that could be a few million dollars to pump out the water and install ventilation.

“You would be an idiot not to have people on the ground here. You can’t manage by e-mail.”

Phoenix has stakes in several companies in the Pyongyang area. One sells such essentials as soap powder and personal computers. Another develops software using Linux (US trade restrictions mean that proprietary software and operating systems like Windows cannot be sold to North Korea). Another company makes artificial flowers for export.

Mr Frost says he has been contacted by several foreign investment funds looking for joint ventures. The Phoenix website lists many North Korean endeavours looking for partners. Investing in countries such as North Korea may raise moral questions – the country has a poor human rights record and direct investment may sustain a member of what President George W. Bush memorably vilified as the “Axis of Evil”.

But for investors who share Mr Bush’s sentiments, there is always the Roosevelt Anti-Terror Multi-Cap fund. This open-ended fund, based in New York, will not invest in any companies that do business with “countries that sponsor terrorism”, including North Korea.