A 22-year love affair transforms KIC

Everyone asks Scott Kalb, the chief investment officer for the $37 billion Korean Investment Corporation, how he got the job. Scott, as his name suggests, is not Korean. Well, it’s a long story.

In 1978, a young Scott Kalb got an American academic scholarship to go to South Korea, as part of the US program to assist the country’s development. For some reason, perhaps his youth, he fell in love with the place.

“In 1978 in Korea there were no foreign restaurants, there was a curfew at night, you couldn’t even buy a car,” he says. “The per-capita GDP was about $750 a year. Today, it’s $22,000.”

Kalb stayed there for a time, got a job with the Korean Ministry of Finance in the 1980s, learned the language and found himself going back and forth between Korea and America for the next 20 years. Most recently, he was chief executive of alternatives manager Black Arrow Capital.

When he got the call, last year, to ask whether he was interested in running the country’s relatively new sovereign wealth fund, which was formed in 2005, it was not such a big leap. Both Kalb, and the Korean Government, should be pleased with the results to date.

Kalb says he introduced a three-year plan to broaden the fund’s scope, raise the level of sophistication and introduce outside experience. The fund, at the time, had a 70 per cent allocation to fixed interest and 30 per cent to public developed-market equities.

“The first thing we did was to move to a 50:50 allocation. And then we put 10 per cent of the portfolio into a derivatives replication strategy,” he says.

He also started to build the internal team to take over much of the beta-producing investments, which had been outsourced. The amount given to external managers was reduced from about 55 per cent to 35 per cent.

“But we didn’t change the allocated budget for external managers,” Kalb says. “So we are now paying more, per manager, but we’ve eliminated the beta managers.”

By June last year the fund had started an alternatives program and this year introduced a “strategic investment program” looking at large direct investment opportunities. The alternatives program includes private equity, venture, distressed debt and natural resources.

“As a sovereign wealth fund, we have terrific access to governments and other great partners,” Kalb says. “We can have all sorts of strategic investments.”

One of those was a recent joint acquisition of a $1.6 billion energy investment with China’s CIC, Singapore’s Tamasek and Abu Dhabi’s ADI, which Kalb regards as a “landmark” investment involving the sharing of analytical resources between the four sovereign funds, in making the deal come together.

But being a long-term investor does not mitigate the fiduciaries’ responsibility to buy at the right price, he says.

If you bought at the top of the market in 2007, for instance, it would take a very long time to get your money back.

“Sovereign funds are not really competitive,” Kalb says. “I welcome the opportunity to co-operate with any of them.”

The KIC will grow at the rate of $5-10 billion a year, from government reserves, plus its investment return. Kalb believes it could hit $100 billion within about four years. He will continue to build the internal team as the assets grow. The fund currently has a total staff of 90, with 40 investment professionals in the 60-person investment department.

As with all senior executives on the ‘buy’ side of the industry, he has to cultivate a good working environment to be able to compete with fund managers for talented staff.

“At the moment, one of my staff could get four times his salary by going across the street to work. If I can narrow that gap to maybe two times, then I can work with that,” he says.

But that’s a challenge for a new fund, which has not yet got the track record to get the Government’s complete confidence.

“Talking to other sovereign wealth funds,” Kalb says, “it seems like it takes about 10 years to be able to have that sort of discussion with the government. You have to remember that the government officials are also not necessarily so well-paid either.”

One of the seemingly many reasons Kalb likes Korea is because of the big investment the government has made in the country’s education system.

“The amazing thing about the Korean story is that they’ve started with nothing,” he says. “Korea is quite mountainous and about 80 per cent of the land isn’t arable. They have no natural resources. The only thing they have is human capital, so they invested heavily in that.

Korea spends about 8 per cent of its GDP on education. In 1978, about 60 per cent of students graduated from secondary school, which was one of the lowest rates among OECD countries. Today, the figure is 99.5 per cent – one of the highest.

“Korea, with a population of 50 million people, has more students in the US than any other non-American country except Canada,” Kalb says.