Korea Teachers’ Pension plans to make over 10 new commitments at a total amount of about $700 million to blind pool funds at home and abroad for global alternative assets by the end of this year.
To boost alternative assets exposure and to address the low-yield environment, the pension fund will cut holdings in domestic and overseas bonds by 4%, and equities by 6% by the end of 2025.
“In order to increase the exposures of alternative assets in the mid-long run, we will keep making new investment commitments for flagship blind funds of global top-tier general partners,” said chief investment officer Lee Kyu-hong.
The pension fund will try to allocate its new alternative investments evenly among real estate, infrastructure, private equity and debt in the long term, with a focus on the United States and Europe, Lee told AsianInvestor.
Among current alternative porfolio, 80% of investments are in developed markets, mostly in US and Europe.
“We don't have enough exposure in emerging markets yet. But we will increase them going forward given the growth potential of emerging economies,” Lee said.
The CIO explained that Teachers’ Pension prefers blind pool funds because of their diversified nature, as it is trying to diversify the portfolio as much as possible. And, the pension fund has limited internal investment capacity with a team of fewer than 40 investment managers.
BOND AND EQUITY CUTS
At the end of June, the pension fund for private school teachers had $20 billion of assets under management, including 44% in equities, 35% in bonds, and 20% in alternative assets.
It will reduce its exposure to bonds to below 35% by end-2021, and below 31% by the end of 2025.
Equity exposure will also come down gradually to about 41% at home and abroad by the end of the year, and 38% by 2025.
“Currently, we have a bit bigger exposure to equities temporarily as a make-up for smaller exposures to alternative assets, while we have in-line exposures to bonds,” Lee said.
Last year, Teachers’ Pension returned 11.49%, the second consecutive year that it generated over 11% of return, following 11.15% in 2019.
Its mid-long term strategic asset allocation plan for 2021-2025 calls for an annual return of 4.1%.
Under the plan, it will strive to raise allocation to alternative assets from 20% now to over 24% by the end of 2021, and to over 30% by the end of 2025.
Domestic and overseas assets each account for 10% in the fund’s alternative portfolio. By 2025, the overseas portion will grow to 20%, with the domestic part staying at 10%.
When selecting assets, Lee said Teachers’ Pension tries to build up barbell positions for each asset class in pursuit of alpha over the longer term.
This means having an overweight position in new-era related growth assets, such as in e-commerce, information technology and healthcare sectors on one hand, while also being overweight in distressed assets, which can also be called value assets or counter-cyclical assets, such as traditional manufacturing and hospitality, Lee said.
A barbell strategy suggests that the best way to strike a balance between reward and risk is to invest in the two extremes of high-risk and no-risk assets while avoiding middle-of-the-road choices.
“As a long-term disciplined investor, we try to be consistent with the strategic asset allocation plans as much as possible, staying away from short-term market-timing decisions,” he stressed.
“The background of our long-term disciplined investment approach includes the belief that short-term directions of financial markets cannot be well-forecasted and that the behavioral biases of investors, driven by human nature of greed and fears, persist for good,” he noted.
Last year, Teachers’ Pension’s growth in alternative assets fell behind schedule due to the pandemic, which made on-site due diligence very difficult. The result was slow deal flows globally. At the same time, the strong equity market has pushed up the overall size of AUM faster than it can grow its alternative assets.
Some of the pension fund’s commercial real estate investments have also fallen in value, Lee noted.
To get around the difficulties of on-site due diligence overseas, it has started to allow online due diligence for blind pool funds before making final decisions, though it insists on a supplementary condition of on-site due diligence when this becomes possible again.