KIC in faster alternatives push to boost performance
The Korea Investment Corporation (KIC) will aim to invest 25% of total AUM in alternative investments by 2025 instead of 2027 in order to further improve diversification and capture illiquid premiums, according to Chief Investment Officer Lee Hoon.
As the share of alternative investments increases, the sovereign wealth fund will be optimising the allocation of sub-strategies within the asset class, Lee said.
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The fund has increased its exposure to alternative investment in recent years, to 16% by 2019, 17.5% by 2021, and to almost 23% by 2022. The moves were made easier by the decline in value of equities in the portfolio due to tumbling markets.
“We actively increase our investments in alternative assets as part of our asset allocation strategy. This approach allows us to benefit from the diversification advantage by capitalizing on their low correlation with traditional assets. By pursuing long-term investment, we aim to capture illiquid premiums and enhance overall returns,” Lee told delegates as he opened AsianInvestor’s 15th Institutional Investment Forum Korea in Seoul in late June.
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OPTIMISING STRATEGIES
As its AUM and share of alternative investments both rise in the overall portfolio, KIC will be targeting the private markets more specifically to balance both considerations of returns and risk.
“Going forward, we plan to gradually increase this private asset allocation while considering vintage risk. Simultaneously, we are optimizing the allocation of the sub-strategies within the alternatives asset class by conducting analyses based on growth and volatility perspectives. This optimization, we believe, aims to improve the risk-adjusted returns,” Lee said.
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In the private equity sector, KIC is aiming at tech, healthcare and venture capital opportunities while taking a more cautious, conservative approach that factors in market volatility and inflation. Its private debt strategy focuses on direct lending, as well as corporate mezzanine and distressed debt.
KIC began startup investments in 2017. These were originally entrusted to outside asset managers, but it is now becoming increasingly “hands-on,” according to Lee.
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EXPANDING OVERSEAS
A large share of alternative investments is managed by KIC’s regional offices in Singapore, London and New York. Most recently, KIC has also set up shop in San Francisco to be close to the startup and venture capital opportunities in nearby Silicon Valley’s tech scene.
As well as diversifying among asset classes, the sovereign wealth fund is looking to expand its geographical exposure. KIC indicated in March that the Indian city of Mumbai is a likely contender for its next permanent presence.
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In 2022, KIC posted the largest annual loss since its inception in 2005, with nearly $30 billion wiped off its value and an annual return of -14.4%. The blame lay with poor performance of equities and bonds, with losses of 19.3% and 16.7% respectively. The figures mirror those of state-owned investors across the industry.
However, KIC’s alternative investments outperformed traditional asset classes, with private equity posting an annualised average of 14.7% between 2017 and 2022. Real assets notched a 7.6% return, while hedge funds achieved a 4.8% return.
Also read: KIC's alternatives strategy pays off despite 2022 losses