South Korea's Police Mutual Aid Association is set to increase its exposure to foreign alternatives and stocks and to boost its manager research capabilities in a bid to raise its target return over time to 6% from its current 3.37%.

The $1.74 billion savings fund is eyeing new types of assets such as overseas private equity funds, and would consider making direct investments in emerging-market securities, said chief investment officer Lee Doyoon, who joined in October 2016.

PMAA has a 15% allocation to alternatives (5% local and 10% foreign) and aims to increase that to at least 20% “in the medium to long term”, Lee told AsianInvestor, without being more specific on the time frame.

The fund is considering investing in offshore private equity and venture capital funds, said Lee, although the environment for such investments has not been attractive in the recent past. Many PE managers have not been successful in deploying investments lately, he noted. “As such, PMAA has not been very active in them, although it has great interest in such asset classes.”

PMAA will also double its foreign equity exposure to 2%, while cutting its allocation to domestic bond position and local alternatives. Fixed income accounts for 40% of its assets under management, of which 30% is in local debt and 10% overseas.

Outsourcing plans

In making such moves, PMAA intends to outsource more investment to asset managers, both locally and globally, said Lee. The fund aims to hire four more professionals to help with manager research this year, to add to the 10 focused on securities investments and 10 in the real estate division.

Lee said PMAA was short of research staff capacity and was for the time being working with “outstanding” local asset managers to bridge the gap.

The fund expects offshore alternatives, such as private equity, private debt and infrastructure, to yield more than their local equivalents, he added, because of the expected rise in overseas interest rates and the “unique product structures” of certain foreign assets.

PMAA's overall return on foreign investments has averaged 5% over time, noted Lee. The fund invests 65% of its AUM locally and 35% in foreign assets.

Bond allocations

In respect of its debt portfolio, PMAA does not invest directly in foreign bonds, he said, as it is very challenging to manage the credit risk of such assets. It outsources such investments using foreign managers – for example, PMAA invests in notes structured by Goldman Sachs that include credit default swaps.

For foreign bond investments, the fund is considering using US managers Pimco and BlackRock. It invests directly in local fixed income.

Asked how PMAA was positioning in response to potential US rate hikes, Lee said such hikes would reflect stable economic growth. As such, he noted, PMAA would respond by increasing its commodity and securities investments while implementing hedges against US inflationary risk.

What about the effect of political risks in Europe and the US, such as uncertainties over Donald Trump's policies and Britain's exit from the EU? Lee said: “PMAA considers investments with no influences from specific countries, regions, or sectors, so there will not be no direct impact from such issues.”

Asked whether PMAA used investment consultants, Lee said it did not do so as yet, but that it did receive market information and advice from Russell Investments and Willis Towers Watson.

PMAA background

PMAA invests 40% of its total AUM in bonds, 15% in alternative investments (local and global), 4% in local equities, 1% in foreign equities, 35% in real estate (local 70% and global 30%) and 5% in short-term loans to its members. By the end of 2017, Lee said he expected the fund to hit $2.09 billion.

Lee joined PMAA from Samsung Asset Management, where he was head of fixed income for three years. Prior to that, he was with Korea Investment Management.

PMAA and Korea’s other leading institutional investors will be joining AsianInvestor’s 11th annual Korean Institutional Investment Forum in Seoul, June 20th. For further information visit www.koreaiif.com.