Korea’s KIC accelerates move into alts to better manage volatility

Korea Investment Corporation (KIC), the country’s $169.3 billion sovereign wealth fund, is increasing its allocation to private assets and accelerating the expansion of the portfolio faster than initially planned.

“KIC plans to raise its allocation to alternative assets to 25 per cent by 2025 from 22.8 per cent ($38.7 billion) at the end of 2022 to enhance its returns while better responding to market volatility amid macroeconomic and geopolitical uncertainties,” confirmed a spokesperson for the fund that was set up in 2005 with $1 billion seed investment.

The move reflects an acknowledgement that the benefits of diversifying into equities and fixed income “are becoming less apparent.” Strategy at KIC is increasingly focused on exploring new investment strategies and expanding alternative investments, diversifying across asset classes to build a long-term investment portfolio that is less susceptible to market volatility.

Despite a “proactive risk hedging” programme and the fast-growing allocation to alternatives (alternatives where 17 per cent of AUM in 2021) sharp falls in bonds and equities meant the fund suffered a -14.36 per cent loss in 2022.

The fixed income allocation (31.6 per cent of AUM) and equity (38.3 per cent of AUM) make up the bulk of KIC’s “traditional” portfolio and has seen an annualized return of 4.06 per cent since 2004.

In contrast, since its launch in 2009 the combined alternatives portfolio of private equity (9.5 per cent) real estate and infrastructure (9.7 per cent) and hedge funds (3.3 per cent) has achieved an annualized investment return of 8.23 per cent.

KIC will focus particularly on investment opportunities in private credit markets, and the spokesperson told Top1000Funds.com the investor will access opportunities both directly and through external fund managers. KIC began making direct private equity investments in 2010 and co-investments with GPs in 2011.

KIC had previously aimed to raise its alternatives target to 25 per cent by 2027.

The decision follows other leaps forward in its approach to alternatives that include last year’s acquisition of private debt manager Golub Capital. In a nod to “the sharp growth of the private debt market where loans to blue-chip companies can generate stable cash flows” KIC strengthened its partnership with Golub by becoming a shareholder.

Elsewhere, KIC opened a new San Francisco office in 2021 to better hunt opportunities for its  venture investment programme KIC Venture Growth (KVG) that seeks “secure high-growth potential opportunities” that will “expand our portfolio.” The KVG fund aims to deal with industry paradigm shifts and identify excellent tech assets early on.

KIC is also setting up an Indian office, following in the footsteps of other investors including Canada’s Ontario Teachers’ Pension Plan (OTTP) and Singapore’s Temasek. CDPQ opened a Delhi office in 2016.

Hedge funds

KIC begun investing in hedge funds in 2010 and runs a diversified strategy using multiple approaches. Going forward, a particular focus will be on absolute return strategies that take advantage of arbitrage opportunities such as equity L/S, event-driven and fixed-income arbitrage, seeking to tap the impact of rising interest rates, increased market volatility and other changes in the financial environment.

Asset allocation decisions are based on KIC’s long term strategic asset allocation; strategic tilting, and tactical decisions. Going forward, KIC plans to strengthen the role and function of asset allocation in consideration of financial market conditions, the characteristics of each asset class and its investment horizon to achieve its investment objective.

“We hold an asset allocation forum every quarter to integrate top-down and bottom-up views from various investment departments and formulate a house view to ensure a reliable asset allocation process,” states its annual report.

The investor has also strengthened its risk management processes, particularly macroeconomic research capabilities as well as re-examined its investment processes to build a system that can withstand future “black swan” events.

Recruitment

KIC’s expansion into private markets has called for an overhaul of its recruitment practices. Nurturing talent across its 300-plus employees is now a central seam to strategy. “The world’s top financial institutions are all trying to secure and retain the best people. It’s a war for talent,” states the report.

KIC went through six recruitment rounds in 2022 and is giving staff more opportunities to study abroad, actively developing overseas investment training programs in collaboration with top global managers. Management philosophy now includes a commitment to “happiness management” by creating a workplace of “respect, consideration and fun and generating positive synergy among employees.”

In April 2022 KIC launched the International Finance Academy, an educational program that nurtures overseas investment specialists and supports the development of Korea’s finance industry. The fund has also revamped its compensation system “because we know that if KIC wants to grow excellent talent, they need excellent compensation.”

Domestic finance industry

Another critical component of strategy involves developing the domestic finance industry. KIC has strengthened its partnerships with domestic financial institutions by making commitments with two asset managers for overseas equity mandates.

“By entrusting domestic managers with more assets and continuing to diversify our strategies, we will actively help Korea’s financial institutions hone their overseas investment capabilities and become more globally competitive.”

It’s a similar story in hedge funds.  Last year KIC supported the overseas hedge fund investments of domestic financial institutions by participating in more joint ventures with them. “With our diverse hedge fund investing experience, and through showcasing our management capabilities, we are helping lead the development of the domestic finance industry.”