While 2022 was an unusual year for asset owners universally, the year proved even more of a challenge for Korea’s Public Officials Benefit Association (POBA).
While facing turmoil in global markets, the pension fund that works as a mutual aid fund also faced its own unique turmoil that required swift action and adjustments to stabilise fund management, Huh Jang, chief investment officer at POBA, said after receiving AsianInvestor’s award for best regional asset owner.
Due to interest rate hikes since 2022, the liquidity of Korean financial institutions has been influenced by changes in interest rate differentials between commercial banks, non-bank depository institutions and mutual aid associations like POBA.
In addition, POBA was under pressure to meet unpredictable capital calls arising from commitments to overseas alternatives fund vehicles made prior to 2022. Lastly, the sharp appreciation of the US dollar-to-Korean won exchange rate made those US dollar-denominated capital calls and hedging costs more expensive. The Korean won depreciated against the dollar by more than 17% from February to October 2022.
“Those three drastic environment changes brought us to some difficulties in terms of liquidity management. That was the additional challenge that we confronted last year, along with global environment changes,” Huh told AsianInvestor.
When 2022 started, POBA’s total assets under management AUM was almost W19 trillion ($16 billion) of which W13.8 trillion or 72.8% was allocated to alternatives. The relatively high allocation to more illiquid private assets in alternatives meant that options for creating liquidity in its portfolio were constrained.
With changing financial conditions, POBA began managing new commitments conservatively. Firstly, they started to control the money being deployed by preferably utilizing separately managed accounts with asset managers, especially for alternatives investments.
POBA also made efforts to better manage its currency hedging. Due to the rapidly changing exchange rate and the subsequent increase in hedging costs, POBA changed its existing currency hedging policies extensively.
“Based on our previous internal guidelines, we had to hedge currency by a certain amount on the sector-by-sector basis. But when I joined POBA back in February 2022, I asked my team members to un-hedge the position of overseas equity to zero from 50%,” Huh said.
POBA did so because, historically, there has been a certain degree of correlation between the US equity performance and the USD/KRW exchange rate.
“When the US stock market falls, the Korean won tends to depreciate against the US dollar. As a result, a Korean won-based total return ends up being hedged naturally,” Huh elaborated.
POBA expected the global financial market to be very volatile given uncertainties in the investment environment. The highest inflation in 40 years has made it difficult to predict what would happen, according to Huh. With an emphasis on conservative portfolio management, POBA decided to reduce the volatility of its portfolio performance.
To that end, the fund downsized marketable asset exposures such as public equities from 11% in the portfolio to 6-7% in the first half of 2022, a heavy reduction in such a short time span. Secondly, POBA exited from some private assets.
“We have lowered the exposure in private assets to take some profits,” Huh said.
Internally, POBA made efforts to strengthen the “control tower” function with the investment strategy team.
During the positive market run leading up to 2021, the alternatives investment teams – private equity, private credit, real estate and infrastructure – were somewhat competitively investing with an attempt to improve performance.
The fund rebuilt its strategic investment team internally to coordinate investment priorities between the teams. The strategic investment team is also actively implementing tactical asset allocation and keeping an eye on liquidity and risk management to brace for market changes.
In order to take advantage of opportunities provided by rising interest rates, POBA has recently restarted buying of domestic, won-nominated bonds, especially IG corporates. They not only have the attractive coupon rates, but are highly liquid, according to Huh.
“Even AAA-rated corporates provided over 5% coupon at a time when the market liquidity risk has peaked. We bought those dislocated bonds with a very cheap price. We could also avoid currency hedging issues and costs when we buy Korean won-denominated bonds,” Huh said.