The Korean Teachers’ Credit Union intends to mitigate volatility in its W26.7 trillion ($22.5 billion) portfolio by allocating more to alternative assets, its chief investment officer Kang Sungseog told AsianInvestor.

Kang took the CIO role in 2015, capping a 28-year career at the institution. Under his guidance, KTCU was one of the few Korean institutions to post strong returns last year, notching a $1 billion gain, of which some $100 million was booked as pure profit (the rest was earmarked to meet liabilities). Last week, Kang was named CIO of the Year in AsianInvestor's annual Korea awards.

His strategy has been to reduce volatility-driven losses in public markets by raising its alternatives exposure. Typical government pension funds or similar entities in Korea will allocate 20% or so to public equities, but KTCU’s allocation is only 12% and will decline in favour of alternatives.

KTCU said it received net inflows of W2 trillion ($1.7 billion) a year, and is expected to reach $45 billion in size by 2025. The investment team now puts 50% of net inflows into alternatives.

“Stock investments are not sustainable,” Kang said. “They are unpredictable and subject to big losses.” Moreover, fixed-income markets face negative returns and are increasingly unattractive, he added.

Alternatives deliver the best returns, he noted. This is true of both domestic and international exposure. KTCU invests almost 40% of its portfolio in private equity, structured products, real estate, infrastructure, and loans. Returns from these assets enabled the fund to generate total returns exceeding its 4.32% annual liability in calendar 2015.

KTCU began working with global alternative investment managers six years ago. Many of its early deals were co-investments into real estate. It is now shifting more assets to blind funds, as it gains experience of and confidence in such vehicles.

Kang acknowledged that alternatives carried risks, particularly given the growing demand among global investors for such assets, which affects pricing and returns. “There is too much money in this market,” he said. “It’s a risk we have to take.”

One way to mitigate this risk is to seek out the safer corners of alternatives: for example, KTCU is increasing its exposure to mezzanine debt funds. It is also increasing allocations to private debt providers that make loans to companies as banks retreat from this space, due to rising regulatory capital charges. Such strategies can return as much as 6% a year, Kang said. 

Wealth managers and institutions such as insurers in the region are also increasing their focus on private debt, and AsianInvestor has tipped it to be the best-performing alternative asset class by risk-adjusted return this year. 

Other than market volatility, his biggest concern this year is China’s economy. But KTCU’s liabilities and its steady inflows of new money mean the institution cannot simply sit out choppy markets. Kang and his team will continue to respond by adopting longer-term assets in private markets.