More seek higher yields

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More seek higher yields


In an era of rock-bottom interest rates, more investors are venturing away from traditional investments such as bonds and equities in favor of high-yield alternative options like private equity funds, real estate and infrastructure investment.

According to the Bank of Korea on Tuesday, alternative investments totaled 260.3 trillion won ($234.3 billion) in 2015, growing over fourfold from 2006. Alternative investment took up 16.7 percent of the country’s gross domestic product at the end of 2015, up from 10.6 percent in 2006.

With Korea’s benchmark interest rate at a record-low 1.25 percent, investors have been more keen on seeking high-return financial products than ever before.

“The increasing demand for alternative investments is caused by investors’ appetite for high-yield products amid low interest rates,” said Lee Jeong-wook, who led the central bank’s research into alternative investments. “As the country is becoming an aging society, more and more investors are looking for long-term investment portfolios.”

Pension fund operators including the National Pension Service constitute the largest investor base because of the complex nature and long-term outlook of alternative investments.

Large institutional investors are moving to increase the portion of their portfolios taken up by alternative investments, which currently account for an average 10.7 percent in local pension operators’ portfolios, according to the Korean Capital Market Institute.

“Pension fund operators in other countries favor alternative investments because they allow them to hedge risks through diversified investments while ensuring fair returns,” said Tae Hee, a researcher at the Korean Capital Market Institute.

“The government recently announced measures to ease regulations on alternative investments. That will prompt investors to set aside more funds for alternative investments.”

The range of alternative investments has diversified to encompass ship vessels and art pieces as well as hedge funds, managed futures and real estate. Still, investments on infrastructure, also known as public-private partnerships, take up the largest portion among all alternative investments, at 39.5 percent.

Following public-private partnerships is real estate with 22.6 percent. Investors have traditionally taken interest in office buildings and landmark properties, but the latest hot investment is large logistics centers.

“Seoul’s office buildings fall short of delivering promised returns because they are oversupplied, and the vacancy rate is high,” said Kim Eun-ki, a researcher at NH Investment & Securities. “Currently, logistics centers are in high demand thanks to the booming e-commerce sector.”

In response to the trend, securities companies have recently competed to hire alternative investment specialists.

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