Korea Investment Corporation (KIC), which expects turbulent markets next year, plans to boost its alternative asset allocation and environmental, social and governance (ESG) investments, said its chairman and chief executive Choi Hee-nam.

Choi Hee-nam

KIC will steadily increase alternative assets in its portfolio, from the current allocation of about 16% to possibly 20% ultimately, Choi said at the Milken Institute's 2020 Asia Summit on Thursday (December 10).

The sovereign wealth fund had 15.6% of its $157.3 billion in assets allocated to alternatives at the end of 2019. Of this 6.2% is invested in real estate and infrastructure.

Choi did not elaborate on the type of alternative assets the fund plans to acquire or by when it wants to achieve the 20% allocation target. However, KIC’s investment direction is in line with global asset owners who are increasingly looking at alternatives in the current low-interest-rate environment.

Even as KIC seeks to increase its allocation to risk assets, the sovereign wealth fund is maintaining a cautious market outlook.

"We are optimistic about equity markets, but on the other hand, you have to worry about a possible market shock that could emerge at the end of next year," he said. “So we're working very hard to achieve better returns across asset classes."

Low-interest rates have led to an overall decline in returns across traditional asset classes, impacting the typical portfolios that are allocated to 60% stocks and 40% of bonds, Choi noted. It had been hard to maintain performance with increasing stock volatility, and with bonds losing their appeal KIC has had to change its investment strategy accordingly.

KIC will also continue to monitor whether anti-globalisation sentiment grows due to travel restrictions and protectionism, he said.

Since the market turmoil in March, the sovereign wealth fund has been working hard to ensure that risks in its portfolio are diversified across a broad range of alpha sources. Daniel Oh, the lead portfolio manager for fixed income external fund management at KIC, said in October that the credit spread segment of the fixed income portfolio had recorded its worst performance since March. The key to ensure decent performance is to diversify not only in terms of strategy but risk factors as well, he had said.

ESG FOCUS

Choi also reiterated KIC's commitment to ESG investing, joining other big asset owners like Australian Super. ESG investment has come to the fore amid the global health crisis this year, as investors have become more concerned about the welfare of employees.

"We plan to strengthen our socially responsible and sustainable investing, and we will continue to apply ESG standards across our portfolio," he said. KIC will better communicate ESG-related analysis with other parties to make a difference through impact investing, he added.

According to the fund’s first green sustainability report released in June this year, KIC plans to introduce solutions to monitor information such as ESG ratings and stewardship activities in its investment system. Such functions are expected to be launched in 2021.

The sovereign wealth fund will also expand its ESG investment infrastructure so that all investment managers can apply ESG factors in their decision-making process, the report said.

In early 2018, it adopted the stewardship codes, a set of guidelines for institutional investors to exert their voting rights. It also hired a global asset manager for its first ESG mandate. It then internally developed the KIC Stewardship Principles, which it released in December 2018, which offer guidance over its approach to exercising shareholder rights, including through proxy voting.