Korea’s Public Officials Benefit Association (Poba) has reduced its allocation to global equities by 40% since the end of 2017, as it sheds assets seen vulnerable to increased market volatility.
Poba’s allocation to overseas equities currently stands 3.8% of its total portfolio, down from 6.6% at the end of last year, its chief investment officer told AsianInvestor in a telephone intervew.
“We have lowered overseas equity exposure because we needed to reduce volatility to achieve absolute return,” Jang Dong-hun said.
The overall equities allocation, including both global and domestic equities, also decreased, from 24.6% at the end of 2017 to about 17% currently, he said on Friday.
“With that kind of high proportion, it’s really difficult, or impossible, to generate absolute return on an annual basis – it’s really tough,” Jang said.
Absolute return strategies aim for positive returns regardless of market conditions, typically by keeping volatility low.
Volatility has been a concern for investors throughout 2018, especially since early February. After averaging 11.1 throughout 2017 and the first month of 2018, the Cboe Vix, a popular measure of market volatility derived from S&P 500 index options, jumped to 37.32 on February 5. As of October 22, it had averaged 15.8 since that date.
In place of global equities, Poba has increased its allocations to illiquid credit investments. These include private debt funds, structured notes, and collateralised loan obligations, which are a combination of equity, mezzanine, and senior tranche loans, Jang said.
The Korean pension fund’s current allocation to illiquid credit is about 11%, up from 8.3% at the end of 2017, he added.
Poba has over 50% of its portfolio in alternatives, which it believes is essential for its absolute return strategy, especially in uncertain market conditions.
Jang said in December that Poba was eyeing further investments into private debt, infrastructure, and private equity to diversify its portfolio investments.
Within alternatives the Korean pension fund has been turning to hedge funds as alternative asset prices have increased and had expanded its allocation to the asset class this year by about $60 million, as of June.
It intends to eventually have about $100 million invested in hedge funds before the end of 2018.
Higher alternative asset prices are also the reason why it has allocated around $70 million to $80 million to US-listed real estate investment trusts (Reits), having had no exposure to the asset class in 2017.
Poba is not alone in cutting back on global equities.
For example, Australian sovereign wealth fund Future Fund recently announced it had pared its equity investments in response to rising global interest rates and potentially higher inflation.
According to its December portfolio update, the sovereign wealth fund had 32.7% of its portfolio in equities, including 26.3% in global equities, at the end of 2017. By September 2018 its global equities allocation had eased to 25.3% and its overall equities allocation was 31.8%.
Global growth expectations among asset managers are also at their lowest since November 2008, according to Bank of America Merrill Lynch’s October fund manager survey.
For the moment, Poba has no plans to cut its allocations to global equities further, Jang said.
“Maybe before the end of this year, if the market appreciates dramatically, then we could consider. However, at this valuation level, we will maintain,” he said.