As Korean pension funds and life insurers seek to increase their alternative and foreign investment exposure to boost returns, a major challenge they face is a lack of suitable in-house expertise.
Investment heads at state institutions outlined how they were looking to address this issue, during a panel at AsianInvestor’s 10th annual Korea Institutional Investment Forum in Seoul last month.
Jang Dong-hun, chief investment officer for the Public Officials Benefit Association (Poba), said his fund’s assets were rising by W1 trillion each year and were expected to hit W15 trillion by 2020.
In order to achieve absolute stable returns of at least 5%, the fund is moving to raise its allocations to overseas fixed income and alternative investments, as he outlined recently to AsianInvestor. That is easier said than done.
Poba’s investment division has 44 employees, for instance. “That’s not a small team, but it’s not huge either, to cover all the issues [we face] and the workload,” said Jang.
Alternative investments now account for 41% of Poba’s total AUM. Thirty-five percent of this focus is invested into blind-pool investments, and the organisation is seeking to raise this amount as it likes indirect investing because it "more effectively meets our investment capacities", said Jang.
The other 65% of Poba's alternative investments are currently in direct or co-invested "project investments". Moreover, he said, the fund aims to target assets with a minimum 10-year horizon and increase the size of investments it makes.
As part of this process, Poba is looking for general partners to help it make investments and is building a qualified in-house management pool to better challenge external investment views, he added.
Park Min-Ho, CIO of Korea Teachers Pension Fund (KTPF), said his organisation’s portfolio was also growing fast – at W13 trillion and counting – and needed to improve returns.
The domestic/overseas investment ratio is 80/20, whereas three years ago it was 90/10, he said. “Since this is a challenging environment and it’s hard to create yield, we are focusing on diversifying our portfolio to invest overseas.”
He said the organisation’s priority was to nurture in-house experts, with an emphasis on building alternative investment expertise, but that takes time and money. One way that KTPF is addressing the cost of making overseas and alternative investments is to seek partnerships with other institutions looking to do the same.
The Government Employees Pension Service (GEPS) is a very recent convert into offshore investing, having only created an overseas investment team two years ago, mostly to focus on exchange-traded funds and foreign equities, noted Choi Young-gwon, the CIO.
However, the government pension fund has increasingly embraced alternative assets, and is set to increase its allocation to them from 16% to 20% this year. “The low-interest-rate environment is persistent, so our overseas AI is growing steadily, and we are set to offer secondary PFs [project financing loan investments],” said Choi.
His main investment headache is the audit GEPS conducts when selecting managers. “We have to rely on a beauty contest and RFPs [requests for proposals], which serves as an obstacle to timely investments,” he lamented. This is something the fund is looking at, particularly given that it outsources about half of its assets to external firms.
Of course, going offshore easier for some asset owners than others. Another panellist, Cho Sung-sik, managing director of Mirae Asset Life, said the insurer benefited from its association with the broader Mirae Group to help it expand into more overseas investing.
The company has W19 trillion invested locally, and W8 trillion (30%) in overseas markets, the maximum it is allowed. The firm is investing in high-yield and emerging-market bonds and real estate, as well as equity-linked funds.
All the participants at this panel of the conference spoke in Korean; the above quotes are based upon a real-time English translation at the event.