Korea’s POBA balances short-term gains with long-term strategy
For Korea’s Public Officials Benefit Association (POBA), long-term strategy cannot be neglected while short-term results are delivered.
This duality has helped to shape the investment strategy for the mutual aid association, chief investment officer Huh Jang explained to delegates at AsianInvestor’s 15th Institutional Investment Forum Korea in Seoul on June 23.
As pension funds are mandatory funds that are immune from potential “bank runs” or early withdrawals, they can focus more on long-term allocations. However, this is not the case for mutual aid associations like POBA, so short-term returns become more important.
“We are not a mandatory fund. It is based on members’ willingness, whether they are going to subscribe to this association, so short-term return is very important. And volatility in the short-term return leads to a crisis of confidence, so we need to manage volatility to a certain extent,” Huh said.
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This means that the fund tends to focus on its alternatives portfolio, which makes up more than 75% of the total assets under management (AUM), to align it with the cashflow needed to provide members the opportunity to also withdraw when needed. At the same time, the fund is shifting focus from both private and public equity to income-generating debt investments.
“To secure a certain level of cashflow, we need to put priority on carried return for members. Until now, mutual aid associations like POBA have been focusing on equity investments. In a high interest rate environment like now, we need to focus on income-generating investments, like fixed income investments that provide cashflow,” Huh said.
PERFORMANCE PRESSURE
As of end 2022, POBA managed an AUM of W21 trillion ($16.13 billion), which has risen to over W23 trillion in 2023.
With its roots in the Korea Local Administration Association founded in May 1952, POBA is now serving more than 325,000 members, among them public officials of local governments, nationwide.
The fund has managed to increase its membership by almost 50% since 2005, a nod to its performance. For instance, POBA managed a positive return of 3.8% in 2022, a year when many other institutional investors saw negative returns.
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However, such merits also increase expectations from the members. Huh pointed to five priorities that POBA currently considers when structuring its portfolio.
“Most [importantly] of all, we need to define the risk profile of the managed assets. We would then define the interest rate that we bear, and the liquidity, and target return. And fifth would be our strategy to hedge against foreign exchange,” Huh said.
On the latter, the CIO elaborated that because POBA has about 60% of the portfolio exposed to overseas markets, exchange rate hedging is a very important factor.
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Due to capital market regulations, insurers need to have a 100% overseas exchange rate hedge, but pension funds and mutual aid associations don’t have to adhere to such a specific regulation and can more freely decide whether or not to hedge. But Huh does not necessarily see this as an advantage.
“I think that [the freedom to hedge] makes the situation even more difficult for the association, and nowadays when you look at the swap costs of Korean won to US dollars, it is exceeding 200 basis points, so I think the strategy of exchange rate hedging has a great impact on our return,” he said.