CIO defends KIC over stigma of Merrill losses
The new CIO of Korea Investment Corporation has leapt to the sovereign fund’s defence, decrying the negative stigma attached to its loss-making investment in Merrill Lynch as unrepresentative of its achievements.
Delivering the closing address at AsianInvestor’s eighth annual Korea Institutional Investment Forum in Seoul last week, Choo Heung Sik praised KIC’s performance since it started international investment in 2006 as phenomenal.
“KIC began from scratch; no one helped us,” said Choo, referencing Singapore’s sovereign wealth fund GIC, which enjoyed a three-year incubation period with support from the Monetary Authority of Singapore.
“In eight years we [KIC] have achieved the stature we have today [$72 billion in AUM as of this March]. No one can say Koreans are not skilled in finance,” Choo told the audience.
He said KIC had beaten its benchmark by a percentage point for two consecutive years (2012, 2013). “As a newly formed organisation, that is quite a remarkable feat,” he stressed. “Yet our reputation in the market is not all that favourable.”
Constant references to the Merrill Lynch investment – in January 2008 KIC invested $2 billion into the troubled US investment bank and suffered significant losses subsequently – were blind to KIC’s positive performance, he argued.
KIC came in for criticism over the transaction, given its overall assets under management at that time were only $20 billion, meaning it was risking 10% of its assets in a single investment.
“It is something that can easily happen to a new organisation,” explained Choo. “It’s not a big deal now, we have been able to recover a lot of the losses. The Merrill Lynch incident was a painful experience, but it is like a medical cure now to make us stronger.”
Choo only joined KIC as CIO three months ago, having spent more than 30 years at Bank of Korea, latterly as head of reserve management. He went through a competitive application process to secure the role, and was selected by AsianInvestor as CIO of the year in our Korea awards in 2014.
Choo said he had no regrets about the move, adding it was not one he expected to make but that he had to grab the opportunity. “In terms of the effective management of foreign reserves, I gave all my love to my past lover, now I have to let her go,” he joked.
He said he was impressed with the level of skill and dedication of KIC staff now. “They are great professionals, I’m surprised by their level of passion,” he observed. “KIC is a public institution and compensation is not all that high. But they work all hours and weekends. They like what they do.”
He noted that KIC as an organisation was flat from a management perspective, meaning that when an investment idea is put forward by counterparties such as investment banks, it was not a complicated process to turn it into a real portfolio strategy. “There is no vertical process of approval,” he reflected.
Choo pointed out that KIC had delivered a 9% return in 2013, but warned that achieving such a figure this year would be a challenge in the low interest-rate environment.
He recalled the days when institutional investors simply used to roll over 10-year US Treasuries for 8% annual returns, while balanced portfolios with 60:40 split of fixed income to equities could glean around 14-25% in the 1980s and ‘90s. “We will not see that kind of yield going forward,” he admitted.
He reflected that bond yields were scraping the bottom of the range, while global equities were expensive, with price-earnings ratios around 24%-25% today against a historical average of 15%-16%. “This is a big headache.”
He suggested that while taking no action sounded irresponsible, it was not necessarily the worst response. But he did stress that KIC was setting out to increase its alternative investment exposure to 20% of its overall portfolio, pointing to the 4%-5% illiquidity premium of private markets.
“The Ministry of Strategy and Finance has the final say on this [increased exposure to alternatives], but I believe our proposals will be accepted,” he stated. “Our [alternatives] stake should continuously grow. Where we don’t have internal skills, we can buy them.”
Where he did say KIC had room for improvement was its structure, with the institution working in silos for different asset classes. “It’s important to create investment [synergy] across asset classes. This is another organisational challenge.”
Choo described KIC’s smart-beta division as playing an important part in the organisation, adding: “We have to come up with a more advanced index. There are lots of challenges lying ahead that merit further discussion.”
But asking rhetorically what was the most important factor for successful investment, he highlighted “knowing yourself”.
“You have to ask what is the purpose of your fund. If someone else does alternatives, does that mean you have to do it too?
“Someone asked me what best practice is. Being fit for purpose is best practice. The solution is up to you to identify.”