The $206.5 billion Korea Investment Corporation (KIC) has become the latest asset owner weighing a shift into the total portfolio approach (TPA) in an attempt to boost investment returns.
KIC put out a request for proposal for a TPA consulting partner in May. A fund spokesperson confirmed that the review is underway and will continue into early next year, telling Top1000funds.com: “We are considering the introduction of this new investment framework to expand our role as a fiduciary manager and to enhance investment returns.”
The deliberation came as KIC celebrated its 20th anniversary in Seoul this week, where CEO Park Il Young outlined the fund’s goal to boost financial and organisational performance in the next decade.
Its asset allocation as of last December was 39.5 per cent equities, 31.8 per cent fixed income, and 21.9 per cent alternatives whose build-out has been the fund’s focus in the past few years. It previously set a target of having a quarter of its portfolio invested in alternatives by 2025.
Under the overarching goal to find a feasible TPA framework for KIC, the review will look to introduce a reference portfolio and a factor-based approach to dissect asset class exposures to risk and return drivers. It will also examine new ways to classify investments other than by asset classes as in SAA.
The fund also wants to develop liquidity forecasting models by asset class and strategies and understand how risk and liquidity will be considered on a total portfolio level.
KIC’s current risk management process considers market risks for traditional assets, namely equity and fixed income, and alternative investment risks separately. Market risks are managed through the SAA framework of tracking errors and portfolio volatility, while alternative risks are contained by designating allocation limits for external managers relative to total value of assets in each alternative asset class, and by monitoring factors like concentration, region, sector and vintage.
Organisationally, the TPA review will determine whether it’s necessary to introduce an “integrated portfolio management” division and define their roles. KIC wants to align its framework with global practices so the review will involve extensive case studies of asset owners with existing TPA models.
TPA organisations outperformed their SAA peers over the last decade by 1.8 per cent per annum, according to a study by WTW’s Thinking Ahead Institute of 26 asset owners. Despite its onerous demand on asset owners’ investment, risk, governance and even sustainability models, more funds are pondering the adoption of TPA (such as CalPERS) due to benefits including better alignment of portfolio goals and room for nimble, opportunistic investment.
Well-known practitioners of TPA in Asia Pacific include Singapore’s GIC, Australia’s Future Fund, and New Zealand Superannuation Fund.
Direct investments take centre stage
Another key focus in the next few years for KIC is the ramp-up of direct investment activities within its $45 billion alternatives portfolio. This will be across all private market asset classes: private equity, real estate, infrastructure and private debt.
KIC will leverage its five overseas offices and establish strategic partnerships with global asset managers, the fund spokesperson said. Three of those international offshoots are entirely dedicated to private assets investments: the San Francisco office homes in on private equity and venture capital due to its proximity to the Silicon Valley, while the Singapore and Mumbai units offer on the ground insights to real assets and private equity deals in emerging markets.
The alternatives bucket has delivered an annualised return of 7.7 per cent between its inception in 2009 and the end of 2024, according to KIC’s latest annual report. Private equity was the bundle’s top performer with a 9.4 annualised return, where KIC began direct investment in 2010 and co-investments with GPs in 2011.
Private debt was carved out as a standalone asset class in 2024 and the roughly $4 billion portfolio is still at an early stage of construction. The fund is looking to expand into areas like direct corporate lending and is seeking co-investment opportunities alongside asset managers. It acquired a minority stake in US direct lending and credit asset manager Golub Capital in 2022 to secure stable cash flows via loans to blue chip companies.
In real assets, KIC is exploring emerging markets and niche sector infrastructure opportunities on top of those in mature markets including North America and Europe, focusing on residential real estate, logistics and data centres.
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