Korea Investment Corporation (KIC) plans to increase its allocation to alternatives in the coming six years to at least 25% of its portfolio to reap the benefits of an illiquidity premium and the asset class’ low correlation with traditional instruments, said chief investment officer David Park.
“As of the end of 2020, we have 15.4% of our AUM (assets under management) invested in alternatives. And by 2024, we aim to raise it to 20% and by 2027 to more than 25%,” Park told AsianInvestor in a webinar* on Monday (January 25).
“We plan to increase the ratio of alternative assets to the extent that it will not adversely affect the overall portfolio’s liquidity, and at the same time have the most efficient and effective portfolio construction,” he explained.
KIC, which had $157.3 billion of assets as of end 2019, plans to take different routes to increase its alternative investments. These include forming joint-ventures with other sovereign wealth funds, co-investments with general partners, or direct investments, Park said.
Last July, the sovereign wealth fund teamed up with the National Agricultural Cooperation Federation, a state-affiliated agriculture services, banking and insurance-provider, to create a private equity co-investment joint venture. It was the first time that it had joined hands with a local asset owner.
It has had alliances with other South Korean sovereign players previously, including an infrastructure investment collaboration with Korea Post in February 2019.
KIC’s investment direction is in line with global asset owners, many of whom have been increasing their allocation to alternatives in the current low-interest-rate environment. According to a report released by the SWF Institute this month, state-owned investors’ average allocation to alternatives had risen from 12% to 24% between the years 2008 and 2020.
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To ensure a resilient portfolio, KIC plans to formulate its investment strategies based on different holdings of the five types of alternatives, namely real estate, private debt, private equity (PE) and venture capital (VC), infrastructure, and hedge funds, according to Park.
For instance, KIC will increase VC assets, which are less sensitive to macroeconomic change, and increase its secondary PE holdings to improve liquidity. It would boost private debt to secure a stable income return, Park said.
One key difference between KIC and its other South Korean peers is its lack of enthusiasm for real estate. While National Pension Service (NPS) and Public Officials Benefit Association (Poba) are investing aggressively in real estate JVs, KIC prefers infrastructure assets.
"We will increase our allocation to infrastructure assets and cut investments in real estate," Park said, citing structural changes in a post-Covid world. He did not elaborate further.
KIC will also strive to achieve a balance between relatively liquid alternative assets, such as hedge funds, and illiquid assets, like infrastructure and real estate. It also aims to have an optimal balance between corporate assets and real assets, and between capital gain and income gain, he added.
Amid a resurgence of Covid-19 cases and lockdowns, Park also said that KIC will further adopt technological applications to construct its alternative investment portfolio.
The move is not without challenges. Unlike traditional assets, it’s not easy to adopt technology in alternative investments because the asset class requires on-site due diligence, he said. Further, while conventional assets could rely on big data for financial modelling and analysis, the datasets for alternative investments are typically limited.
However, KIC plans to push the boundaries in its use of technology, such as big data and artificial intelligence, in the construction of its alternative asset portfolio.
"We have accumulated the necessary information for our alternative portfolio in our database," Park said. “And we are developing a portfolio monitoring system and long-term cash flow forecast models. Recently, we successfully utilised technology to conduct virtual due diligence.
“We are also constructing a database regarding fund-investment-contract statistics and have embarked on standardised contract projects to manage the alternative assets’ portfolio effectively,” he added.
*Josh Jeon contributed to the story by translating David Park's comments, which were originally in Korean.