KIC's alternatives strategy pays off despite 2022 losses

A tough year in public markets has taken its toll on the performance of Korea’s sovereign wealth fund, but an increasing allocation to alternatives has counterbalanced some of the losses.
KIC's alternatives strategy pays off despite 2022 losses

Sovereign wealth fund Korea Investment Corporation (KIC)'s annual loss in 2022 was its largest since the global financial crisis of 2007-2008, according to its annual report. 

However, its alternatives portfolio managed to outperform.

The fund posted a 14.36% loss for 2022, equivalent to a loss of $29.7 billion. The steepest loss for the fund was in 2008, when it suffered a 17.5% fall in return, a spokesperson told AsianInvestor.

Assets under management (AUM) in 2022 totalled $169.3 billion, according to a statement by Korea's Ministry of Economy and Finance at the National Assembly on February 21.

“A simultaneous double-digit dip in equity and fixed-income indices amid higher inflation, rising interest rates and uncertainty over recession made the investment environment exceptionally challenging last year.

"A stronger US dollar contributed to a further decline in the investment result as KIC reports investment performance in US dollars,” a spokesperson told AsianInvestor.

Traditional assets were heavily hit last year – losses on equities and bonds were 19.3% and 16.7%, respectively. Between 2018 and 2022, the annualised return of equities and bonds were 5.7% and negative 1.5% respectively.

KIC's annualised return since inception in 2005 until end-2022 was 4.12%.

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The fund's alternative investments, however, outperformed with total annualised return for the past five years standing at 9.68%, according to preliminary data.

More specifically, private equity and real assets showed 14.7% and 7.6% returns over the past five years, respectively. Hedge funds achieved a 4.8% return over the same period.

“As KIC has gradually expanded alternative assets, the enhanced portfolio diversification has alleviated risk and volatility stemming from stock bond markets,” the spokesperson said.

Alternative assets made up 22.8% of total AUM at the end of 2022, up from 17.5% a year ago.

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The sovereign wealth fund aims to increase the share of alternatives to 25% of its portfolio by 2025, which was previously planned to happen by 2027.

To reach this target, the pace of investment will likely remain high for the asset class, although the decline in value of equities in the portfolio, due to tumbling markets, might have eased the task of increasing the percentage share of alternatives.

“KIC will focus on proactive asset allocation, hedging strategy and portfolio diversification, to deliver stable and sustainable long-term investment return,” the spokesperson said.

KIC only invests overseas and alternative Investments are done through its regional offices in Singapore, London, New York and most recently San Francisco where KIC hopes to keep an eye on tech developments in Silicon Valley.

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