The head of reserve management at Bank of Korea says he is keeping an open mind to investing in alternative assets in future and wants to hear about opportunities in the asset class.
Further, Choo Heung-Sik points to the growing importance of emerging markets exposure, both from a currency diversification perspective and in terms of returns relative to embedded risks.
It comes as the BOK, which manages $330 billion of Korea’s foreign reserves, has been extending its asset-class composition, diversifying out of government bonds and into corporate fixed income and equities.
“As of now alternatives are not in our investment universe because of liquidity concerns,” Choo tells AsianInvestor. “Having said that, I do not want to close my door completely.
“Personally I want to hear about opportunities in the AI area. The reason is that markets change, our risk-return profile changes and our asset size changes. Probably there should be a point where we invest.”
Choo notes that at the start of the century BOK was probably not considering exposure to global equities or emerging markets. Yet now equities make up 6% of its assets, from zero in 2007, and it has started to raise exposure to EM currencies and bonds.
“If you have a long-term perspective, emerging market currency has become as important part of reserve management,” Choo says. “So it is natural for us to look in that direction very gradually.
“Emerging markets can also provide us with a higher return relative to embedded risks compared with our current asset-class composition. Looking ahead, emerging markets are going to be more important.”
On the question of equities, Choo notes that the return is more volatile than for bonds. “But we think equities have the effect of enhancing our risk-return profile because of their negative correlation with bonds,” he confirms.
As at the end of 2012, BOK held 94% of its assets in cash and fixed income. But over the past decade it has halved its proportion of government bonds to about 38% of its foreign-currency-denominated assets.
Corporate bonds now make up an increasing 13% of its fixed income portfolio, behind agency (22%) and mortgage-backed securities (17%).
For a full interview with Choo Heung-Sik, head of reserve management for Bank of Korea, please see the forthcoming May issue of AsianInvestor magazine.