KIC looks to increase alternative investments

Korea Investment Corporation, the nation’s $72 billion sovereign wealth fund, plans to double alternative investments over the next 10 years to compensate for declining returns from stocks and bonds.

“We’ll have to embrace the lower return expectation from traditional assets and that will continue for a considerable period,” Choo Heung-sik, 56, the chief investment officer of the state fund, known as KIC, said in an interview in Seoul on April 21. “Considering such an environment, expanding into alternatives is one of the most efficient ways to protect yield in the mid-to-longer term.”

KIC joins sovereign funds from Norway to Angola and investors worldwide seeking to diversify their portfolios as bond yields rise by increasing their investments in alternative assets, such as private equity, real estate and hedge funds, to achieve stable returns. The Korean fund is looking to invest as much as 20 percent of funds into such assets, said Choo, declining to provide an estimate on how much KIC will spend in the 10-year period.

Traditional assets such as fixed income and equities accounted for 90 percent of KIC’s portfolio as of December, while alternatives made up about 10 percent, the Seoul-based company said on Feb. 4.

Choo, who joined KIC last month after working as the head of foreign-exchange reserve management group at the Bank of Korea since 2011, is sticking to his predecessor’s strategy in diversifying KIC’s portfolio. Lee Dong-ik, the former CIO, said in August that KIC plans to spend as much as $10 billion to triple its allocation to alternatives over the next three years.

Founded in 2005 to invest some of the nation’s foreign- exchange reserves offshore, KIC initially bought bonds in 2006 before adding equities in 2007. It began alternative investments in 2009, according to its 2012 annual report.

The state fund set up an internal research team this year to find better investment opportunities, Choo said. It plans to hire employees for its alternative asset management department, which currently has about 20 members, he said, adding that distressed bonds and high-yield bonds are among investments being considered.

KIC posted a 9.1 percent gain last year, leading to an 8.3 percent average annual return in the five years through 2013, it said in February. The fund had $65.1 billion of traditional assets as of Dec. 31, yielding an 8.7 percent return, it said. That compares with the 12 percent return in the previous year, according to the 2012 annual report.

KIC is considering opening an office in Beijing this year as it seeks to expand investments in China where the economy and financial markets are growing, Choo said. The fund has a $400 million quota under China’s Qualified Foreign Institutional Investor, or QFII, program. It doesn’t have any immediate plans to apply for an additional quota, he added.

Choo earned a master’s degree in economics from Michigan State University after studying at Yonsei University in Seoul, according to KIC.

“I want to help KIC explore some gray areas between the traditional and alternative assets,” said Choo. “As the size of our total assets grow, the pace of growth in alternative assets will be much faster than before.”

Bloomberg