South Korea’s State Fund Plans Boosting Alternative Assets

Apr 24, 2014 1:33 am ET

(Updates with researcher’s comments in seventh paragraph.)

April 24 (Bloomberg) -- Korea Investment Corp., 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 way 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.

Norway, Angola

Norway’s state fund, the world’s biggest, is seeking to increase the proportion of real estate in its portfolio to about 5 percent and agreed to buy a 45 percent stake in a Manhattan office building for $684 million in September. Angola’s sovereign wealth fund is beginning to invest in hotels and commercial infrastructure in sub-Saharan Africa, its chairman, Jose Filomeno dos Santos, said earlier this week.

“We do see a trend that state funds in general are searching for higher yielding alternative investments,” said Sven Behrendt, managing director at Geneva-based GeoEconomica, which researches sovereign wealth funds. “That is driven by a low interest rate environment, but also the increasing capacity of sovereign wealth managers to confidently allocate capital across all asset classes.”

Slowing Return

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.

Beijing Office

KIC had $5.7 billion of alternative investments including hedge funds and real estate as of December.

Its only strategic investment, a stake in Bank of America Corp., accounted for 1.6 percent. The sovereign fund bought a $2 billion stake in Merrill Lynch & Co. in February 2008, months before the firm was forced to sell itself to Bank of America. KIC held a 0.71 percent stake as of December, according to data compiled by Bloomberg.

The fund’s investment committee regularly assesses whether it needs to keep or sell the stake, Choo said.

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 masters degree in economics from the 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, who joined the Bank of Korea in 1982 and helped manage traditional assets. “As the size of our total assets grow, the pace of growth in alternative assets will be much faster than before.”

--With assistance from Klaus Wille in Singapore.