In many ways, South Korea is on an upswing. Gross domestic product has jumped 8 percent this year. Local politics are fairly stable. And stock prices have rallied more than 25 percent since a slump early in the year caused in part by concern about North Korea's nuclear capability.
So why are the closed-end country funds that buy Korean stocks suffering, with some now trading in New York for less than they are worth?
Consider the pending liberalization of local securities laws. The changes could prove a boon to U.S. investors, particularly the three newest Korea funds, which operate at a disadvantage to the fourth, the 10-year-old Korea Fund.
But for now, the concern about the liberalization has depressed two of the funds and taken the air out of the Korea Fund, which used to trade at huge premiums to its net asset value -- the market value of the securities it owns -- because it was not easy for foreign investors to get into Korea otherwise; now it trades for about market price.
For Thomas J. Herzfeld, whose namesake investment firm in Miami specializes in closed-end mutual funds, the situation has created a buying opportunity.
Mr. Herzfeld recently took a stake in the Korea Equity Fund, one of the newest of the four closed-end Korea funds that trade on the New York Stock Exchange, to take advantage of its 11.6 percent discount to net asset value.
"Our strategy in trading country funds is to buy when there are disasters," he said. Often that means riots, devaluations or coups; here, he pointed to the securities law changes. The turmoil caused by them, however, make it particularly important for investors to be cautious.
Since Korea opened its stock market to foreigners in 1992, outsiders have been limited to 10 percent of a company's total capitalization. That limit will rise to 12 percent on Dec. 1 and 15 percent next year.
Because of the limit, foreigners have long since bought up the allowable quantity of stock in the best companies.
The top five holdings of the Korea Fund, introduced by Scudder, Stevens & Clark in 1984 through a special agreement with the Korean government, reflect the nation's corporate elite: the Samsung Electronics Co.; Korea Mobile Telecom; the Hyundai Motor Services Co.; Samsung Fire and Marine Insurance and the Keum Kang Co., a construction concern.
"Those are the stocks that tend to lead rallies, and they are also the stocks that are difficult for newer funds to obtain," said Michael Stout, a closed-end fund analyst with Morningstar Inc., the mutual fund research company in Chicago.
"The newer funds can't afford to pay the 50 percent premiums that are sometimes charged for shares available for foreigners."
As a result, the Korea Fund is the only one of the four to be successful; indeed, it has consistently outperformed the Korea composite stock price index. The shares closed Friday at $25.25, up 59 percent since the end of October 1993.
But in the same period, the net asset value rose 95 percent. The difference is the shrinking premium. Slightly more than a year ago, investors were willing to pay 30 percent more than the fund's net asset value; now the premium is only 6 percent.
Of the other three funds, only the Korean Investment Fund, managed by Alliance Capital Management, has a 12-month record. Its net asset value is up 28 percent since the end of October 1993.
But during the same stretch, its price has risen only 6 percent, to $13.875. It now trades at a discount of 8.1 percent to net asset value.
The Korea Equity Fund, managed by Nomura Capital Management Inc., has the largest discount, at 11.6 percent.
The newest entry, Fidelity Advisor Korea Fund, was started on Oct. 25. It is being aggressively sold through brokers and closed on Friday at $15, a premium of 9.2 percent, despite being subject to the same negatives as the other funds.
John J. Lee, manager of the Korea Fund, said the current skepticism was exaggerated. "A similar thing happened at the end of 1991, before the market was opened up," he said.
"People thought they didn't need to buy Korea Fund, but they found out how difficult it is to invest there, and we got back to a premium in our price."
Two stocks, Korea Electric Power and Pohang Iron and Steel, offer investors a Korea play on the Big Board, through American depository receipts. And some open-ended funds that specialize the Pacific Rim have taken positions in Korea, providing investors with diversification.
Mr. Lee said he was bullish on Korea.
"It has really regained its competitiveness in Far Eastern markets over the last three or four years," he said. He said a number of Korean companies were establishing manufacturing plants in its northern region.
"Korea could be a really enormous beneficiary of China's development," he said.