KTCU aims to lift US bond, alt allocations

Korean Teachers' Credit Union seeks higher yields in US bonds and infrastructure amid the spectre of a potential trade war.
KTCU aims to lift US bond, alt allocations

Rising US interest rates have the Korean Teachers' Credit Union (KTCU) looking increasingly at investing in US bonds for returns, though hedging the currency risk remains a key concern.

That was among the key insights shared at AsianInvestor’s 12th Korea Institutional Investment Forum on June 20, as KTCU chief investment officer Kang Sung-Seog talked about the Korean pension fund’s strategy for mitigating risk in the current shaky global financial environment.

In the 10 years since the global financial crisis, super-low interest rates became the new normal, Kang told the audience. However, the Federal Open Market Committee (FOMC) has lifted US interest rates by a quarter percentage point seven times since December 2015, with the latest increase in June bringing the target range of the federal funds rate to 1.75% to 2%, and as a result he said KTCU sees an opportunity for higher US bond returns.

“Because of the high interest rate coming from the US nowadays, the return [from the US bond market] is going up, so we are planning to increase [our allocations] to it,” Kang said. 

The major challenge for KTCU is how to hedge the interest rate risk now that US rates have climbed above Korean rates -- having tightened monetary policy in November for the first time in six years, the Bank of Korea has held its base rate steady at 1.5%.

But any advantage gained through the growing US interest rate premium could be lost through fluctuations in the dollar-won exchange rate.

“If we just want to be in the Korean market only, the risk of the interest rate might not be a problem, but if you want to go overseas, the interest rate disparity can be a problem, so probably we can just use our hedge for the currency,” Kang said.

“That’s what we are going to use as our strategy in the future,” he said.


With the increasing trade frictions, we are more concerned this year about the economic environment, Kang said.

The US and China have engaged in a tit-for-tat implementation of tariffs since March, covering products such as aluminium, aeroplanes, pork products, flat-panel televisions, medical devices, and soy beans, with the latest round of US tariffs -- 25% on 818 product lines worth about $50 billion -- set to come into force on July 6.

On June 1, the US also imposed a 25% tariff on steel imports and a 10% tariff on aluminium imports from the European Union, Canada, and Mexico, after applying it to the rest of the world on March 23. These tariffs followed a 30% duty placed on solar panels and a 20% to 50% duty on washing machines and components announced in January.

In times of increased risk, we will have to have more diversified investment assets, and that’s one way for us to overcome the crisis that we face, Kang said in comments translated from Korean into English.

At the same time, private equity funds and real estate funds have become increasingly expensive, making it more difficult for institutional investors like KTCU to find good returns on investment. So one area KTCU has been looking at is mezzanine financing and direct loans to corporates.

These alternative investments all have a collateral or a guarantee for this physical asset, which actually helps mitigate some of the risk, he said.

“When we say alternative investments, a lot of people think that’s more risky, but in fact, even if there is a default of the company that issues the debt, it does not mean we’re going to lose the investment completely,” Kang said.

As a result, KTCU views alternative investments as stable assets, not least infrastructure assets, which can generate cash flow for 10 to 20 years. “Even if there is a drop in the asset class price, we are still able to stand by this difficult situation until the price recovers,” Kang said.

Including infrastructure, loans, private equity, and real estate, KTCU's alternative investments accounted for close to 40% of its overall portfolio at the end of last year.

In July 2017, KTCU reportedly partnered with Korea’s Public Officials Benefit Association and other Korean investors to invest W200 billion ($179 million) into Macquarie’s fourth North American infrastructure fund.

The teachers' pension fund is by no means the only institutional investor to shift capital into infrastructure and other alternative investments.

Already this year, the Canada Pension Plan Investment Board (CPPIB) has announced that it will be an anchor investor in India’s first private infrastructure investment trust and Japan’s Government Pension Investment Fund (GPIF), the largest pension fund in the world, has announced a global infrastructure mandate. Indian insurer Edelweiss Tokio Life Insurance also told AsianInvestor in May that it had made a small allocation to infrastructure investment trusts, while HSBC Insurance’s Hong Kong unit said it has been looking at alternatives like infrastructure debt in recent years.

This story is based on quotes translated from Korean at the event.

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