KIC mulls ways to boost returns

South Korea's sovereign wealth fund expects to double its AUM to $100 billion in five years. It has also added significantly to its staff this year.
KIC mulls ways to boost returns

Seoul-based Korea Investment Corporation, like other big institutions, is busy trying to resolve the issue of how to get a decent return these days as its portfolio grows.

Methods being considered or already used by new chief investment officer Lee Dong-ik* including boosting KIC's alternatives exposure, investing more in China and considering including a bigger absolute-return portion in its portfolio.

Lee replaced Scott Kalb in May amid what is a very tough market for investors. And finding returns will become ever trickier as KIC expands in size. He expects the $47 billion sovereign wealth fund to hit $50 billion by the end of the year and $100 billion in 2017.

The number of in-house staff will grow accordingly with KIC's AUM, says Lee. The fund has 130 staff in total, around half of which are investment managers, and it has added 20 employees this year, mostly on the investments side, including analysts and traders.

KIC had already indicated it wants to boost its exposure to alternative investments, and Lee says it hopes to see its 15% portfolio exposure to alternatives rise to 20-25% within the next few years. But that depends on discussions with the Ministry of Finance and the central bank, he notes. 

Asked whether KIC is raising its allocation to emerging market debt, Lee says the fund has found the asset class increasingly attractive, especially given the current market environment.

Meanwhile, the SWF is also busy deploying the $200 million qualified foreign institutional investor (QFII) quota it received earlier this year that allows it to invest in onshore Chinese securities. KIC will mostly put it into equities but some will go into fixed income, says Lee, and it will do so using both the in-house team and external managers.

Currently the most important question for investors is how to tackle the low-interest-rate, low-yield environment, he notes. “It's everyone's problem, and we expect to see a low-yield environment for an extended period.

“One interesting direction could be to use more of an absolute-return ingredient in our current mandate, but that's not been decided as yet," adds Lee. “That would probably involve looking at more exposure to alternatives and some rebalancing of the public securities portion.”

Meanwhile, how is KIC positioned versus potential downsides (or upsides) from global issues such as the eurozone crisis or the economic slowdown in China?

Lee declined to comment on the fund's view on Europe, apart from to say: “We can go overweight or underweight depending on our market view, but I'd rather not say what our positioning is on certain countries or regions.

“In terms of China, I have a different view from people normally these days,” he notes. “Macro indicators say China is slowing down, but you don't always invest by macro indicators. It's still a huge and growing market. Getting an elephant moving is very hard, but once it's moving it's hard to stop. And it's still moving. There's plenty of momentum and upside in China still.”

*See the upcoming (September) issue of AsianInvestor for a detailed Q&A with Lee Dong-ik.

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