Korea’s Public Officials Benefit Association (Poba) has more than half of its overall portfolio in alternative investments, but the pension fund aims to further increase its infrastructure and real estate assets, according to chief investment officer Jang Dong-Hun.
At AsianInvestor’s 11th Southeast Asia Institutional Investment Forum on December 3, Jang told the audience that the pension fund is looking to grow its holdings in infrastructure debt and real estate investment trusts (REITs).
Having started three years ago from a low base, the infrastructure portion of its W13.9 trillion ($11.7 billion) portfolio has grown to $1 billion, 85% of which is invested in equity assets (public and private) with most of the rest in debt. Jang added that Poba has stocked up on cash which it will allocate to both real estate and infrastructure in times of future volatility.
As the pension fund continues to venture outside its domestic market, diversifying investments in real assets into more regions and sectors form part of Poba’s new goal for next year: 2020 will be a “symbolic year” in which Poba plans to generate more than half of its portfolio’s returns from overseas investments, Jang said.
It is also pursuing more joint ventures and club deals with other international asset owners to do so.
“We think that by collaborating with major investors, we can source better quality deals, and we would like to have more control and ownership in our investments,” he said.
It has most recently executed its first joint investment into Europe’s logistics properties with Danish pension fund PFA. Last year, the public pension scheme also committed $200 million each in joint ventures with California State Teachers’ Retirement System and Teacher Retirement System of Texas to invest in US real estate debt.
While Jang added that it’s too early to judge whether these ventures have been successful, Jang said that the deal quality “was much better than [that of] our competitors investing in the market”.
Over the years, Poba’s alternative programme has slowly evolved from investing in single projects, committing to blind commingled funds and using separately managed accounts to forming joint ventures.
BETTER HEDGING STRATEGIES
While an annual 5% absolute return target in Korean won terms might sound modest, it’s not easy considering that Poba manages the foreign exchange risks by hedging between 80% and all of its investment principal.
Jang told AsianInvestor separately that a one-year FX swap hedging US dollar costs up to 3%, and that the pension fund has “quite a high exposure” to dollar-denominated assets.
“Definitely that [high hedging cost] will be a burden and trouble for us,” he said at the forum, adding that the fund hedges less for public equities and private equities, as the dividends and returns are not as stable as debt investments.
“We need more sophisticated hedging strategies in the future,” Jang said. As the fund reviews its book on an annual basis, if the changes in foreign exchange rate go over the expected returns of a given project, such as a dollar-based property investment, “then we will get in trouble for that year,” he added.
To see to that need, Poba added an FX specialist to its investment team this year and has plans to diversify into assets denominated in currencies other than US dollars.
“As time goes by, the overseas position of our portfolio is growing quite fast, we are trying to diversify into different currencies… we may consider diversifying into euro, Japanese yen, or sterling-based assets,” he said. Poba is also in frequent contact with service providers that supply hedging services.
“If we have a well-diversified FX portfolio, then if we hedge less, in the longer run, we can save some hedging costs,” he added.