Editorial Board Spotlight: The book that steered POBA's ex-CIO towards alternatives
In 2015, Jang Dong-hun faced an exciting new opportunity in his career as he took on the role for chief investment officer at Korea’s Public Officials Benefit Association (POBA), one of the country's largest pension funds.
It also posed significant challenges. With a background primarily in public equities, he faced the task of managing a portfolio with an annual risk-adjusted return target of 5%.
“I was trying to find information and knowledge to be well prepared for this new function, so I read the book ‘Pioneering Portfolio Management’ by David Swensen, the legendary Yale endowment fund manager,” Jang told AsianInvestor.
At the time, he was in search of inspiration and education on constructing a portfolio that went beyond equities.
“I read Swensen’s book several times, and it added some asset allocation perspective. I could combine my traditional asset class knowledge with his insights, and that helped me to confidently generate returns for POBA’s portfolio,” Jang explained.
Jang is currently an advisor at Korean legal firm Yulchon, having stepped down from his CIO role in February 2022.
He is also part of AsianInvestor's Editorial Advisory Board.
ALTERNATIVES PIONEER
Swensen's book, published in 2000, promotes a proactive asset management strategy for institutional investors. It was the strategy Swensen himself effectively employed with Yale University's endowment fund since 1985.
The book highlights several key points, including the long-term potential for higher returns from equity investments, the importance of diversifying beyond publicly traded securities for a well-rounded portfolio, the value that active managers can bring in less-efficient markets, and the advantage enjoyed by patient investors.
“The book helped me understand the use of and adjusting to private market investments,” Jang said.
Also read: How a $50,000 student-managed fund shaped POBA ex-CIO's career
When Jang became POBA CIO in 2015, the Korean pension fund had only 1% of its assets in infrastructure. There was also no investment in private debt, and alternative assets were focused on single domestic projects, Jang said.
Fast forward to the end of 2021 -- a few weeks before Jang stepped down as CIO -- more than 72% of the pension fund's portfolio was invested in alternative investments.
From 2011 to 2015, POBA’s five-year annualised return was 3.7%. That almost doubled to 6.9% from 2016 to 2020. In 2021, the return was 10.9%.
GOVERNANCE IMPORTANCE
Swensen, who managed Yale's endowment fund until he passed away in 2021 -- made his foray into alternatives at a time when there was much less reliable data available on performance private market assets, Jang said.
The success of the Yale endowment fund and other US endowments was important proof of concept.
Since then, the book has been revised and updated.
“The investment environment has of course changed since Swensen wrote the book. However, his ideas and teachings on private markets are still valid and a must-read for asset owner investment professionals that look for inspiration.
But to make it work, governance of that asset owner is important,” Jang added.