Bank of Korea, the central bank of the Republic of Korea, has announced it will recruit a professional from outside to run a newly created reserve management group.
This is the first time BoK will hire from the market instead of appointing someone internally to such a senior position.
BoK now manages $312 billion in foreign exchange reserves as of the end of August, the largest amount in its history.
The “reserve management group” is an upgrade of the central bank’s existing “reserve management department”, with the as-yet unfilled position of group head to also have deputy-governor status. There are only five such positions with that level at BoK, including this new role.
A spokesman explains this represents an enhancement of the function’s status within the central bank. The increased prestige comes with a bigger budget and the mandate to hire investment professionals.
The new group was announced earlier this year. It is currently headed by Hong Taeg-ki, who was the previous head of the FX reserves department. His next move within BoK is not yet known.
This will mean changes to how BoK operates, both internally and in its relations with fund managers and the markets. It is seen by external fund managers who work on behalf of BoK as more of a cultural change. One person familiar with BoK says hiring market professionals will be a welcome move. "The BoK has come a long way but it is still opaque; we're never sure who's really in charge, the staff is constantly under rotation, and they've lost some good people to the market."
The reserve-management group head will have responsibility over the investments, risk management, performance evaluation, settlements and overall supervision of the BoK’s foreign reserves. The role oversees a staff of over 80 people. Applicants must have at least 10 years of global investment experience at either domestic or global financial entities. BoK says it wants to announce the new executive in December, with the aim of the person starting work in February 2012 on a three-year contract, with a possible second term.
This marks a continuing trend among Korean institutional investors to professionalise their investment management leaders. Korea Investment Corporation, which is partly seeded by BoK assets, named foreigners to its CIO roles: Guan Ong, previously of Prudential Financial and now head of his own credit hedge fund in Singapore; and the incumbent, Scott Kalb, a former US hedge-fund manager with Korea experience.
Market sources in Hong Kong and Seoul say the advent of KIC, most of whose assets are FX reserves bequeathed by BoK, has created friction with the central bank, whose own stodgy investment record suffers in comparison.
The comparison is a bit unfair, as BoK’s mandate remains capital preservation and liquidity, while KIC was established specifically to invest in risk assets. But across the region, central banks are universally being pushed to take on more risks.
As the size of Asian FX reserves builds up well beyond traditional needs to cover temporary balance-of-payment shortfalls, Asian central banks have become more comfortable allocating greater portions to risk assets. Loose monetary policy and low interest rates in G3 markets has also made central banks wary of overexposure to US Treasuries and Japanese government bonds, while the euro’s structural crisis has undermined that currency’s bid to become a reliable alternative.
Thus more central banks are either moving down the risk curve, taking longer duration or exposures to credit, lesser-rated instruments or less liquid ones. BoK has moved into investment-grade bonds as well as regional credit mandates. Some central banks are even moving into other asset classes, including equities and alternative investments – as the Hong Kong Monetary Authority has recently done. To date, the BoK has not gone down this route.
Fund management salespeople also speculate the professionalisation of BoK's investment management suggests it will further drag its heels over further capital injections to KIC.