The Korean Federation of Community Credit Cooperatives is rotating its real estate portfolio from prime, tier-one assets into those it feels has more return upside, as it moves to raise its property exposure.
The institution, with around W45 trillion ($37 billion) under management, has also reduced its bond allocation amid the challenging global environment for fixed income, said chief investment officer Jeung Jae-ho.
Such moves come as KFCCC steadily builds its alternatives exposure and reflect Jeung’s goal of diversifying into less conservative assets.
The institution raised its alternatives allocation to 20% of AUM last year, while cutting its fixed income allocation to around 79% from 83% and equities to 0.55% from 1% (allowing for rounding), Jeung told AsianInvestor. He said it would maintain these allocations in 2017.
“Due to the increased uncertainty about US interest rates, investments in fixed income assets in 2017 are expected to be very challenging,” he said. “But since the main strategy of KFCCC is to buy and hold bonds to maturity, the coming higher-interest-rate environment will provide fixed income assets with opportunities for higher returns.”
The US Federal Reserve raised interest rates last month for the first time in 2017 and is forecasting two more hikes this year.
Push into real estate
Meanwhile, Jeung expects to continue raising KFCCC’s alternatives exposure, including increasing the proportion of property in this portfolio from $5.4 billion to $6 billion.
More specifically, KFCCC wants to invest in large cities with major potential for property development, said Jeung. Hence it is focusing on places like Washington, DC rather than on existing buildings in large cities like New York.
KFCCC is also selling buildings in top-tier cities such as London and San Francisco and buying in second-tier markets such as Rotterdam, said Jeung.
He feels that, over a three- to five-year investment period, the portfolio will see strong returns from this type of investment strategy.
In addition, in 2017 KFCCC plans to add $450 million in Japanese real estate assets and $45 million in Chinese equities. Jeung expects to make no extra investment in global fixed income assets this year.
More niche assets
He said he was also interested in relatively niche assets such as small-medium sized private equity funds investing in aircraft finance and financial firms.
Ultimately, however, KFCCC will adhere to a conservative investment strategy and invest mostly in fixed income, as the source of its AUM is customer deposits.
But KFCCC will gradually increase its investments in equities if good opportunities arise, Jeung said. He added that the biggest challenge the institution faces is volatility in the local bond market.
KFCCC’s buildup in its alternatives allocation started when Jeung first joined in 2010, with a focus on assets such structured products and property. Before then it was almost zero, but in the first year of his tenure he boosted it to 13%.
He then left the institution to do a stint as head of private equity at Eugene Asset Management in March 2014, before rejoining KFCCC as CIO in March last year.
KFCCC posted 4.9% in investment return in 2016, well above its target return of 3.5% and an improvement on the performance of around 4% in both 2014 and 2015.
Jeung Jae-ho will be speaking at this year’s Asian Investment Summit on May 10 and 11. For more information please visit www.asianinvestmentsummit.com