The Korean Police Mutual Aid Association (PMAA) is shifting its focus away from alternative investments and towards public assets, in the hopes of increasing portfolio liquidity and adapting to higher interest rates.
“We really have to respond and be more resilient against high volatility and a high interest rate environment in our portfolio,” Han Jong-seok, chief investment officer at PMAA, told delegates at AsianInvestor’s 15th Institutional Investment Forum Korea in Seoul on June 23.
The W5-trillion ($3.9 billion) fund had almost 70% of total assets under management (AUM) invested in alternatives by end-2022, while fixed income stood at 25%, and equity at 5% — but this ratio is already starting to shift, according to Han.
“In the first half of this year, our equity portion has almost doubled and now accounts for 7-8% of our portfolio. Such a strategy will remain strong going forward in the second half of 2023,” Han said.
PMAA made a return on investment of 5% in 2022, with alternatives alone making a 5.4% return.
The CIO made note of several domestic and overseas events in the past year that have been causing upset markets and infusing volatility. Among them were struggling institutions Silicon Valley Bank and Credit Suisse, which added a general uncertainty beyond higher inflation and interest rates.
“There were a lot of landmines in the market, and everyone has been hit hard, but our concern is that these issues could be recurring in the future. So overall, from the portfolio perspective, we would like to have more flexibility,” Han said.
PMAA is therefore working on increasing what Han called the portion of liquidity and quasi-liquidity assets within equity and fixed income. In terms of equity, the CIO sees quite a desirable situation in the short- and mid-term, when looking at capital flows.
Within fixed income, PMAA has its eyes set on Asia’s emerging markets. Previously, it had been difficult for the fund to focus on Asian and emerging markets because of systemic uncertainty and volatility in exchange rates.
ASEAN countries are now moving towards manufacturing, and global foreign direct investment (FDI) has been flowing into these markets. Han mentioned the example of Indonesian government bonds with yields of 6-7% as an attractive option with high returns when diversified in a multi-asset strategy including equity.
“When you look at different countries like the US, China, Taiwan, and Korea, the major countries are trying to respond to the possible adverse [situations], so I don’t think the exchange rate will be so volatile in the future. We will focus relatively more on creative fixed income that is maybe mixed with equity, with higher returns,” Han said.
SHIFT IN ALTERNATIVES
As alternative assets have long duration and limited liquidity, Han finds it timely to restructure PMAA’s portfolio when the volatility in the market is high, increasing the requirement for liquidity.
“To deal with this imbalance in our portfolio, we have decided to reduce the portion of alternative investments over the next three to four years. Until now, we were overdependent on them, so we have [since stopped],” Han said.
He emphasised that PMAA is not trying to dispose of its portfolio in the market, but that the fund will prioritise liquidity. Given that the portfolio has been set up for a low interest rate environment, now is the time for a fundamental review.
“[Particularly] for corporate financing, a lot of blind fund investments have been reviewed fundamentally. And half of our alternative investments is in real estate, so we are trying to strengthen our control over these investments,” Han said.
With the positive view on equities and plans to further increase allocations, PMAA’s investments in private equity and venture capital need to be reviewed, leading to selective investments in this asset type going forward.
“In terms of real estate, there will be new growth real estate products with different structures. So we are looking at preferred lending for data centres, and the structure is quite favourable as the breakdown looks quite solid, so I think we will focus more on those,” Han said.