The $15 billion fund for Korean public officials, POBA, has reached new heights including a diversified, resilient portfolio, full funding and a stellar return due to a global alternatives program. Amanda White spoke to CIO Dong Hun Jang.
In the five years that Dong Hun Jang has been chief investment officer of POBA, the fund for Korean public officials, the funding ratio has increased from 86.9 to 106 per cent.
It’s a more important figure than AUM or return, according to Jang, and really demonstrates how POBA has performed the last five years.
“Our members are very proud, they serve the whole society and the region. Their compensation level is not good enough to prepare for retirement and previously they have been very worried about their retirement life,” he says. “Now they are confident their retirement can be much better than they expected it. That is the really big achievement for us at the fund.”
Due to a mandated tenure of two three-year terms, Jang will step down as CIO in January after six years in a job he says has been the most valuable experience of a 33-year career that included asset management and regulatory roles.
“In this job you have a chance to have a real impact on many peoples’ lives,” he says. “We have around 330,000 members and including their families around one million people are impacted. I’m proud of that.”
In addition to lifting the funding ratio well above 100 per cent, a related measure of success is the stellar performance of the fund during Jang’s tenure, punctuated by a particularly good first six months of this year.
The fund’s asset allocation is distinguished by a huge allocation to private markets – around 58 per cent currently with that likely to increase this year.
Some of the recent value creation highlights include the sale of real estate in Pangyo, Korea’s Silicon Valley, where the fund has been active for the past 10 years.
The team has been frantically allocating capital and in the past six months has allocated at twice the normal rate. This is due largely to the difficulty the fund had in deploying capital in the midst of COVID last year.
“It was the most extreme situation under COVID last year and I didn’t expect the COVID situation to be so prolonged,” he says. “We expect some capital calls from GPs on an annual basis but last year they called much less than we had expected because there weren’t many transactions by GPs, so we couldn’t deploy as much capital as we would have liked.”
Instead the fund used listed equivalents – in real estate and infrastructure – which proved to be quite fruitful.
“We invested in REITs and listed infrastructure to deploy our capital and try to overcome an unusual situation,” Jang says.
While POBA’s focus remains on private markets the public market investments performed well, especially the $360 million allocated to REITs.
“The listed options have performed well for us, especially REITS which was one of the main contributors to this year first half returns. We noticed about $60 million capital appreciation from REITs this year.”
Jang says the ability to make quick decisions and deploy capital quickly was one of the advantages of REITs especially in niche areas.
“In some niche real estate areas it is quite challenging to deploy capital in a limited time, so in those areas REITS are quite useful for our portfolio construction. In areas such as data centres and life sciences we partially used REITS to complement our portfolio.”
Despite deploying quite a lot of capital in the past 18 months, POBA’s cash position is still around 10 per cent and more activity is expected. Jang says from a total cashflow perspective POBA enjoys net cashflow on an annual basis of around $500 to 700 million which allows it to be a little bit more aggressive with illiquid investments.
“Last year we should have deployed capital based on our prior schedule but we couldn’t do it. So many of the planned investment transferred from last year to this year. This year we are quite busy deploying our capital and there is still some work to do. This year is quite unique,” Jang says. “In alternatives we are invested with GPs so their activity and transaction activity is very important for us. The call amounts are bigger than a normal year but we are on the right track now.”
COVID stress test
Despite the difficulties of the past 18 months one of the benefits, according to Jang, is that the COVID situation was a good stress test for the portfolio.
“Based on our experience we noticed some real estate, infrastructure and private debt were quite resilient under quite a stressful situation,” he says. “During the COVID situation we found that some GPs were reacting very well and some were reacting less well, so we could differentiate each GPs capacity and their portfolio so we could see how resilient our portfolio looked like through this very challenging situation.”
Private debt in particular showed resilience, according to Jang, and the fund will continue to focus on increasing private debt positions across real estate and infrastructure.
Similarly more investments will be made in some real estate sectors including logistics, data centres and life sciences and social infrastructure and renewables like wind farms will be a focus.
The fund started the year with assets of 16.4 trillion won and increased that by 1.5 trillion to 17.9 trillion ($15 billion) surpassing the end of year goal of 17.6 trillion won in just six months.
With a proportionately small allocation to public equities Jang is confident the portfolio will not be impacted by any market turbulence and the expected annual return will not be too effected.
“Please consider POBA is quite a conservative public pension so we are not seeking higher returns compared with others. We really care about downside protection, that is much more important for us,” Jang says. “During my tenure we diversified our portfolio especially in offshore alternatives and they are generating very stable regular cashflow investments and returns, we have a very resilient portfolio now. That’s really a precious achievement for me and POBA.”