The biggest challenge to how one of Korea’s biggest institutional investors manages its assets is how it is supervised. Jeung Jae-ho, CIO at the $30 billion Korea Federation of Community Credit Cooperatives (KFCCC), is calling for ministries and government auditors to take a more holistic, longer-term stance when evaluating fund managers’ performance.
Speaking at AsianInvestor’s 7th annual Korea Institutional Investment Forum in Seoul, Jeung says team evaluation and audits focus on single assets in KFCCC’s portfolio.
“All portfolios have areas of profit and of loss,” Cheung says. “If supervisors focus on only one asset class, that makes things difficult.”
This can skew incentives to investment teams. “Sometimes our managers are conservative when they should be more aggressive,” as a result of how they are evaluated.
“I ask other institutional investors and GPs to communicate their concerns to supervisory bodies,” Jeung says.
The rotation system is pervasive among Korean government and financial institutions. It means technocrats and professionals are constantly moving jobs, usually with tenures of just three years. By the time someone learns their job, they have to change jobs, often moving to areas in which they have little or no experience.
A high-profile example of this was the decision by the Ministry of Finance and Strategy to not renew the three-year contract of Korea Investment Corporation CIO Scott Kalb.
Kalb was generally perceived as having performed well, but habits of the rotation system meant he was not reappointed. Because he is a foreigner in a visible role, this case garnered a lot of attention, but it is a reality for bureaucrats and financial professionals across the board – at regulatory bodies, ministries, government agencies, institutional investors and banks.
This has led to criticism by many financial professionals that it is impossible for a long-term institutional investor to make appropriate decisions when employees are judged on short-term performance, and are rotated out before any long-term decisions can materialise.
“If supervisory institutions are made aware of this problem, we can greatly improve the investment environment for institutional investors,” says KFCCC’s Jeung.
He also says institutional investors’ targets and asset allocations are too rigid. Although they are meant to be long-term investors, “the reality is that we have to care about short-term profits, because we are evaluated on an annual basis".
The KFCCC’s investment strategy is to enter new markets, and to improve its networking with other financial participants.
In an era of zero interest rates, investors struggle to know how to allocate capital. KFCCC’s strategy has been to seek opportunities in high-growth Asian countries, with a long-term assumption that the region’s overall share of global economic output will grow over the long term, says Jeung.
For example, KFCCC has taken an interest in companies in Laos. These are small investment deals but they deliver high returns. Korean corporations are active in the country and KFCCC has done enough research on the ground to feel comfortable with such exposures.
To diversify into new markets requires better information sharing among investors and with market participants such as securities companies and asset managers.
Jeung gave an unprompted plug for AsianInvestor conferences. He participated in our May event in Hong Kong. “I saw 200 institutional investors from Asia in a frank and open discussion. The Asian market is actively sharing information and I believe such forums help us,” he says.