Korea Investment Corporation (KIC) plans to continue expanding investment in alternatives, focusing on data centres and warehouse infrastructure and e-commerce platforms linked to online logistics channels and automated logistics systems.
KIC’s chief investment officer David Park said that the fund would also focus on biotechnology and welfare-related industries for the elderly. He noted that it was also securing preemptive hedging strategies targeted at risky assets in the event that market volatility increases due to the central bank accelerating monetary policy normalisation faster than market expectations.
Park had earlier said at an AsianInvestor event in January that KIC has a target of raising its alternatives allocation by 20% by 2024 and to more than 25% by 2027.
As of the end of May 2021, KIC’s assets under management reached $195.7 billion. Investments in alternative, meanwhile, rose to 16.1% from 15.3% as of the end of 2020, Park said.
Since 2005, alternative investments generated an annualised return of 7.7% as at the end of last year, according to KIC’s 2020 investment results published on Feb 10.
“We carefully expect the economy to return to pre-Covid levels and enter an expansion phase around the third quarter of this year,” said Park, speaking at a keynote interview at AsianInvestor’s 14th Institutional Investment Week Korea held online last week.
“As far as interest rates are concerned, we expect benchmark 10-year US Treasury yields, which are nowadays moving between 1.4% to 1.5%, will rise further to around pre-Covid level of 1.8% amid continued economic normalisation coupled with a steady rise in inflation.”
On June 16, Federal Reserve of the US signaled that broad changes in policy may happen sooner than expected, moving its first projected rate increases from 2024 into 2023.
But Park noted that interest rates are still at historically low levels, despite their rise compared to the end of last year, while inflation in major developed countries has consistently run below the 2% target.
“Recent price spikes look transitory amid the recovery’s demand-supply imbalances,” he said. “To sum up, it is difficult to say that a recent surge in inflation likely heralds a long-term trend of rising prices.”
Under such context, KIC is reducing its bond investment “slightly”, Park said, without specifying by how much. To compensate for low return expectations on bonds, KIC will continue to improve portfolio risk-adjusted returns by continually increasing alternative investments, he said.
Besides infrastructure investments related to data centres and warehouses, sectors that KIC is looking at in the alternatives area include e-commerce platforms related to online logistics channels and automated logistics systems, as well as biotechnology and welfare-related industries for the elderly. Park didn’t specify on types of these investments.
As of end 2020, KIC had 35.2% in fixed income, 42.7% in public equities.
KIC recently committed $300 million to GLP Capital Partners' North America-focused logistics fund, GLP Capital Partners IV, in a joint investment with National Pension Service, which also committed $300 million, Korean media reported on May 28.
The $2 billion fund is targeting logistics facilities and relevant technology companies in North America, Korean media said.
As part of its environmental, social, and governance (ESG) push, KIC finished some investments in green projects this March, using proceeds of the Korean government’s $500 million of five-year green and sustainability bond issued in 2019.
Investments include $328 million in green building projects in North America, $127 million in renewable energy infrastructure in South America, Africa, etc, and another $77 million in waste management services in North America, according to its second annual Sustainable Investment report published on June 18.
Meanwhile, to enhance research and investment capacities in overseas innovative sectors, KIC announced in March that it had teamed up with Korea’s shipbuilding giant Hyundai Heavy Industries to W1 trillion ($883 million), including mergers and acquisitions of promising start-ups.
On the same day, KIC also announced the open of its new office in San Francisco to boost start-up investments.
BRACED FOR LOWS
However, given that polarization is growing between new growth-engine industries and existing manufacturing industries, Park told AsianInvestor that KIC will do a thorough analysis and monitoring to mitigate risks caused by tightening government regulations on new-growth industries.
On the other hand, however, if the economic effects of fiscal policy are diminished, “transitory” inflation pressures are reduced, and major economic data released from now on show that the labour market conditions and inflation pressures are not stronger than expected, interest rates will likely stabilize downward from the current 1.4% level until the end of the year, Park said.
“No matter what happens, we will watch the interest rate movements very carefully,” he stressed, noting that KIC has been trying to generate excess returns on traditional assets through new strategies. These include “unconstrained fixed-income strategies” that are not tied to any benchmark, and “overlay strategies” that use futures for asset allocation to avoid disrupting the activities of fund managers.
But due to uncertainties brought about by interest rate and inflation, KIC’s mid-to long-term expected investment returns are bound to be relatively lower than the 10-year average returns, Park noted.
KIC’s return in 2020 hit 13.71%, with a five-year annualised return rate of 8.96% and a 5.22% of average return since inception in 2005, according to its 2020 investment results.