Korea Teachers’ Pension will remain overweight in high-quality credit bonds across all maturities, though, in response to the low interest rate environment, it plans to cut its total exposure to fixed income by 4% by 2025.
The pension fund's strategic asset allocation plan for the period of 2021-2025 includes a strategy to respond to the trends of low interest rates and high volatility in the financial markets.
It will reduce both Korean and foreign bonds positions to below the current exposure of 35% by the end of this year, and further to below 31% by end-2025, reflecting low yields globally.
Meanwhile, it will raise its alternative asset allocation from the current 20% to 24% by end-2021, and to over 30% by 2025, with a focus on overseas investments.
The fund has 29% of its fixed income assets invested in the Korean market, whose benchmark index consists of all outstanding sovereign and corporate bonds with remaining maturities of over three months, and credit ratings of over BBB+, according to Chief Investment Officer Lee Kyu-hong.
“As a public pension fund that holds a principle of a long-term disciplined investment approach, we try not to make market-timing investment decisions to exploit interest rate movements,” Lee told AsianInvestor.
“Instead, we maintain a strategy of having overweight positions in high-quality credit bonds across all maturities (of course with certain limits) for consistent and stable alpha generation,” he said.
Offshore bonds account for 6% of Teachers’ Pension’s portfolio. It invests in foreign bonds through public funds of global asset managers in pursuit of marginal alpha over the return of Barclays Global Aggregate Index.
The fund does not have an absolute return target for its Korean and foreign bonds. Instead, it has return targets of generating marginal alpha over the return of relevant benchmark indices.
Teachers’ Pension often follows a barbell strategy when choosing either an investment industry or strategy across its portfolio.
It is increasing investments in sectors that show counter-cyclical growth, including information technology platforms, semiconductors, and online or remote consumption.
Simultaneously, it will also be overweight in sectors expected to recover strongly after the pandemic, including chemicals, refineries, steel, machinery, shipbuilding and construction, Lee added.
During the first half of 2021, Teachers’ Pension invested over W200 billion ($171 million) in certified ESG credit bonds, of which about two-thirds were invested in green bonds.
“Currently, we do not have a specific budget or type-breakdown of ESG bonds, but we will keep investing in ESG bonds whenever they are available at reasonable prices,” Lee said.
In the first half of this year, the pension fund has started to incorporate ESG elements in its evaluation of external managers for all asset classes, and increased investments in the SRI (Social Responsibility Investment) mandate of Korean equities by around $100 million.
It is in the process of defining internal ESG investment policies or budget targets consulting external ESG professionals to set up consistent ESG investment strategies for the coming years.
Teachers’ Pension is a public pension fund in Korea that provides pension services for private school teachers in the country.