In its ongoing quest to diversify investments and raise returns, Korea’s Public Officials’ Benefit Association (Poba) appointed three fund houses to invest $50 million into insurance-linked securities (ILSs), and began doing so in early December, becoming the first Korean pension fund to do so, AsianInvestor can reveal.
The public pension fund, which has over $7 billion in assets under management (AUM), appointed alternatives investment manager LGT Capital Partners, and the insurance-focused Nephila Capital and Leadenhall Capital Partners to manage the allocation in November, after having conducted a beauty parade in October that attracted over 15 contestants.
“Insurance-linked securities are kind of a hedge fund strategy but we treat them as fixed income-like investment tools, offering stable real estate-like returns,” Poba chief investment officer (CIO) Jang Dong-hun told AsianInvestor.
Insurance-linked securities can take various forms, including catastrophe bonds or other forms of risk-linked securitisation. The instruments are designed to transfer the risk of accident insurance to investors, with investors benefiting from the returns of insurance policies backing the bonds, but risk losing their capital in the event of multiple large insurance claims.
One appeal of the instruments is that their value is generally seen as being based upon factors completely separate to other capital market instruments, such as natural disasters.
Jang said the idea for the alternative asset class was cemented in his mind after he attended a conference in Korea, during which he spoke with US investors that had experience investing into the instruments.
“We recognised that this strategy was available in May and studied it with logistics managers,” he told AsianInvestor. “I then attended a conference [in the summer of 2016] in which select pensions from all over the world came to discuss their strategies, and I asked some of they knew about the strategy.”
Jang said that several of the pension executives told him they had been investing into ILSs for over 10 years and were comfortable with their risk profile. “So I came back and we started to study and do research about them over the next three to four months.”
After conducting research, Poba then held the beauty contest in October, before selecting the three winning managers in November.
“This [the ILS investment and choice of three managers to oversee it] is for diversification purposes,” Jang said. “If it does well we will increase it.”
A regional investment consultancy expert who works with state funds told AsianInvestor that Poba’s foray into insurance-linked securities marks the first time a Korean pension fund has entered this niche asset class.
“We’ve been promoting ILSs for a while as one of our diversifying strategies,” said the expert. “Pricing has become a bit more dear lately so it hasn’t been as strong a push. Poba is new to the investment and there aren’t many others who have made similar investments in Korea.”
The investment marks an ongoing effort by Poba to maintain its 47% exposure to alternatives investments at a time when its overall assets under management continue to mount and the pension fund seeks higher returns than those offered by local low-yielding bonds.
The fund anticipates its AUM will increase to W15 trillion ($12.45 billion) by 2020. Dong said Poba’s net investment into alternatives assets is likely to be W600 billion to W700 billion in 2017 alone, equivalent to around $500 billion, as its overall AUM rises by $1 billion during the year.
The insurance-linked securities mark the latest alternatives divestment for Poba. Earlier in 2016 it reportedly committed assets towards mezzanine fund investments.