The fast-growing Korea Teachers Pension Fund (KTPF) is raising its allocations to foreign alternative and equity investments, as the global monetary policy environment becomes more testing and trade tensions build, in line with other Korean asset owners.
KTPF increased its assets under management to $17.9 billion by the end of December 2017, up 32.4% from a year ago, according to AsianInvestor’s annual list of the biggest 300 institutional investors in Asia-Pacific. That asset growth has helped the Korean fund to leap 15 places to 225th on the AI300 ranking, published in in the June/July issue of AsianInvestor magazine.
One of the key factors driving that growth was the strong performance of Korean listed stocks. “Domestic equity was the best performing asset class last year. The time-weighted rate of return was 25.63%,” Park Dae-yang, KTPF's chief investment officer, told AsianInvestor.
But the pension fund now aims to trim its local equity allocation from 26.5% as of December 2017 to 26.1% by the end of 2018, Park said, adding that he expects the domestic stock market returns to slip to between 6% and 7% this year.
Last year's Korean market rally was part of a broader trend as stock markets globally soared during a rare period of synchronised global economic growth, John Cho, portfolio manager and country specialist for Korean equities at JP Morgan Asset Management, said.
“Korean equities are highly leveraged to the global economy, so the main driver for 2017 was the acceleration in global economic growth,” Cho told AsianInvestor.
But it will be difficult to sustain the growth momentum in 2018, Park said, “in light of growing volatilities in the domestic and international economic and financial environment due to monetary policy normalisation in developed markets and the trade war between [the US and China]".
He was referring to the escalation of tit-for-tat tariffs between the two countries as US President Donald Trump pursues a protectionist agenda and also the Federal Reserve's seven interest rate hikes since December 2015, with more still to come.
Park also had in mind the balance sheet unwinding of the US central bank as it reverses years of quantitative easing by offloading debt securities it accumulated in the wake of the global financial crisis, with the European Central Bank potentially set to follow it in the months ahead.
Altogether that has seen market volatility gauges rise. It's also hit Asian stock markets, including South Korea's, as the dollar has strengthened and capital has been encouraged to flow back to the US. As a result, the Kospi 200 index is down 8.6% year-to-date, according to Bloomberg.
On July 12, Korean central bank the Bank of Korea downgraded its domestic economic growth forecast for 2018 to 2.9% from 3.0% in its April outlook. The report cited subdued domestic labour market conditions, including increasing unemployment rate forecasts, and the potential impact of the US-China trade conflict on Korean exports as risks on the Korean economy.
It is against that backdrop that KTPF is seeking to increase exposure to overseas assets.
“We will increase the foreign equity and foreign alternative investment asset classes to improve diversification and enhance the portfolio return,” Park said.
The pension fund is aiming to increase its foreign equities allocation slightly to 13.4% by the end of 2018, from 13.1% at the end of 2017, and it expects returns of about 7.05%, he added.
The expected return is lower than the 16.09% time-weighted rate of return that KTPF saw from foreign equities in 2017, data from its website shows.
The increase in allocation is part of a five-year strategic plan to lift allocation to foreign equities to about 14.7% from 2018 to 2022.
Reducing allocations to Korean stocks while raising overseas equity allocations is generally in line with the investment behaviour of other Korean institutional investors, John Park, head of Korea institutional business at JP Morgan AM, said.
“Korean institutional investors’ investible assets are growing, while the investment opportunity set in Korea tends to be limited,” Park told AsianInvestor.
Korea's economy is dominated by large family-run, multinational conglomerates known as chaebols. The five largest chaebols alone – Samsung, SK Group, Hyundai, LG and Lotte – account for more than 50% of the Kospi 200's market cap, and that can limit how much a Korean investor can diversify their portfolio domestically.
So with an eye on diversifying portfolios and seeking higher returns while reducing volatility, institutional investors in Korea are increasingly looking at overseas opportunities, Park said.
That includes overseas alternatives. KTPF’s target allocation to such assets is 7% by the end of 2018, up from 5.6% at the end of 2017, with an expected return of 4.29% annually, Park said.
“[The fund] has interests in European and American infrastructure, real estate, private debt and private equity,” he added.
By 2022 the pension fund is targeting a 9.8% allocation to foreign alternatives. Over the same period it aims to lift its overall allocation to alternatives to 21.7% in the same time period, from 17.7% at the end of 2017.
There's a definite trend among Korean institutional investors towards foreign alternatives, Shin Hyun-jang, head manager of the Police Mutual Aid Association’s (PMAA) financial investment division, said on a panel at AsianInvestor’s Korea Institutional Forum last month.
PMAA said last year that it wanted to increase its exposure to foreign alternatives and stocks, boosting its allocation to alternatives to at least 20% in the medium to long term from 15%, as well as doubling the foreign equities allocation to 2%.
The Public Officials Benefit Association (Poba), with more than 50% of its AUM in alternative assets, invested $70 million to $80 million into US-listed real estate investment trusts (Reits) in 2018, after having no Reit holdings last year.
And the Korean Teachers Credit Union (KTCU) said in June that it is looking at mezzanine financing and direct loans to corporates, and that its alternatives allocation, which includes infrastructure, loans, private equity, and real estate, accounted for about 40% of its overall portfolio.