The head of global fixed income for Korea’s NPS says public institutions need to broaden mandate guidelines to include higher-yielding assets under the present economic malaise.
Speaking at AsianInvestor’s 5th Annual China Investment Forum last week in Beijing, Ko Sungwon recognised the need to augment income in the low-rate environment and suggested this could include corporate credit, emerging market bonds, inflation-linked securities and global equities.
He added that as pension funds lower allocations to cash and cash equivalents, they could add new currencies to their foreign reserves, increase exposure to alternatives and take advantage of special opportunities and sector-specific hedge funds.
During a discussion panel at the event titled “The Asset Owners Viewpoint”, Ko revealed how the National Pension Service goes about constructing an international bond portfolio.
It starts by investing in core advanced markets (chiefly US), providing a bird’s eye view on the broader market. It then looks to add Europe and Asia exposure for diversification before adding credit exposure and diversifying further by including emerging markets.
“It is important to take a gradual approach when adding satellite strategies such as credit, rather than doing everything all at the same time,” Ko said. “This way you can control your risk-return profile better, incrementally improving it with each addition.”
Kim Jae-bum, head of alternative investment at Korea Teachers Pension (KTP), noted that it has been rapidly increasing its offshore investments, particularly to alternatives in an effort to boost returns given the dearth of domestic opportunities.
“We expect the current low interest rate in global markets to continue, therefore we have to lower our target rate and reallocate assets out of traditional domestic bond and equity markets,” he noted.
KTP only started investing overseas four years ago, but by the end of last year overseas investments accounted for 8% of its $13 billion in total assets. Kim said KTP was looking to increase this up to 15% within the next three years, while doubling its alternative allocation to 20% over the same period. Its exposure to alternatives includes private equity funds, real estate and infrastructure.
On its alternative investments, he added: “In order to reduce cashflow volatility in the early stage of investment and mitigate the J-curve effect, we will focus on the infrastructure sector and private equity funds in developed countries.”
The J-curve effect in private equity investment occurs when funds experience negative returns for the first few years and gains in outlying years as the portfolios of companies mature.
“As we are still trying to accumulate resources and information for overseas investment, at the current stage we prefer an indirect approach through global asset management companies rather than direct investment,” added Kim, who noted that KTP works with global consultancy firms when it comes to selecting asset managers.