The Public Officials Benefit Association (Poba) is eyeing further investments into private debt, infrastructure and into a new form of private equity fund, as it aims to diversify its portfolio investments in the face of uncertain market conditions.
Speaking to AsianInvestor in December, chief investment officer Jang Dong-hun said the Korean pension fund was seeking to further diversify its fast-growing and alternatives-heavy portfolio into new areas, at a time when markets look highly valued and thus increasingly vulnerable to correction.
“As a whole all asset classes are getting very expensive, which is a big concern for me,” he said. “It’s also really hard to find a very clear negative factor to make the market challenging in the foreseeable future. That means that any factor can be [potentially] pointed as negative news from now on. I will be very cautious [in 2018] in our investment strategy.”
Jang said this could involve Poba refraining from using leverage in its investments, as well as continuing to increase mezzanine and debt investments in real estate and infrastructure.
“In 2018 I think we will continue to increase fixed income investments like private debt and continue to investment in alternative investments, especially in the infrastructure asset class, as they are suitable for our asset strategy,” he said.
Additionally, Jang noted that Poba’s investment committee was set to decide whether to press ahead with an investment into a fund that invests into private equity general partners. “Based on my initial check, the cash on cash return is an expected level of maybe 6% to 8%. We decide whether to oversee [an investment into this fund],” he said.
Jang predicts the fund is likely to continue employ more external fund managers, as its asset base grows by over 10% a year (it expanded around 16% in 2017) and it keeps looking at investment possibilities in less mainstream areas of the capital markets.
Poba is not among the very largest players in Korea’s pension industry, but it is still a decent size, with 270,000 members and assets under management of W10.9 trillion ($10.24 billion) as of December. However, its 47-strong investment team only internally manages domestic equities, employing external fund houses for all other assets.
It has also been a very dynamic investor under Jang’s leadership since he arrived in 2014. AsianInvestor recognised this when naming Poba as the leading institutional investor for Korea in its latest Institutional Excellence awards.
Poba had an equity allocation of 29% when he arrived, but its annual returns as a result were very volatile. Jang has overseen a reduction in this part of the portfolio to 25% at the end of 2017, despite the overall rise of the fund’s AUM and the appreciation of Korean and international equities throughout 2017.
The most notable development since Jang took over as CIO has been the fund’s rising allocation to alternative assets. It stood at 49% as of December, making Poba one of, if not the most willing institutional investor in Asia to invest into such instruments.
“I wanted to make Poba’s investment case as a role model in the Korean pension industry, and to make it we had quite a lot of investment into the alternatives area,” he said. “It was previously quite a fragile portfolio, so I changed it be become more strong and sound.”
Jang said that Poba’s smaller size also helped. “We can be more agile and pick our moves to make a desired of what we should have compared to the giants,” he said.
The focus on alternatives might be unusual, but for Jang it’s entirely pragmatic: Poba has an annual 5% investment return target, which it has calculated it needs to reach in order to ensure its members have sufficient funds as they retire without exhausting its asset base too quickly.
“Poba has an absolute return strategy and to achieve our absolute returns alternatives investments are a really important investment tool for us,” Jang said.
That said, the potential for further growth in the alternatives portfolio is limited. “I don’t think this percentage will increase dramatically [as a percentrage of total AUM] as we need to consider liquidity issues,” he said. “Maybe half of our assets will continue to be invested into the alternatives space.”