Expanding horizons

With two decades working as an economist, analyst and strategist, Park Min Ho is widely credited as the driving force behind Teachers’ Pension incorporating asset liability management into its allocation strategy.

Moreover, he is credited with successfully transforming the fund’s traditionally conservative investment profile to a more returns-oriented one.

Park, who currently heads the asset management division, has worked at Teachers’ Pension since July 2001. He has led the investment strategy team since 2008, and last year was promoted to chief investment officer.

Before joining Teachers’ Pension he served as a senior researcher at both Jangeun Securities and Hana Economic Research Institute. He has also worked previously as head of equity research at Kyobo Securities.

Q What has been the growth of Teachers’ Pension fund in Korea?

A Our assets under management stand at $11 billion. Last year our AUM grew 3.99%, versus 6.4% in 2013. Typically speaking our fund grows about W1 trillion ($100 million) each year, or 7-8%.

So last year was certainly less than we expected. But foreign exchange rates can have a big impact on the US dollar figure. Plus our AUM had seen a big boost in 2012-13 when the Seoul National University’s pension plan was transferred to Teachers’ Pension, from the Government Employees Pension Service.

However, Seoul National University has since become a private institution. As it is no longer a public entity, that money has not been transferred to us in the past year. That partly explains the shortfall.

Q Can you outline your asset allocation?

A As of now 55% of our AUM is allocated to fixed income, 28% to equity and 16% to alternatives. The rest is in cash or cash-equivalent. In our medium-term plan we intend to increase exposure to riskier assets. That will see us cut our fixed income exposure to 43%, while raising equities to 35% and alternatives to 20%. We hope to do this by 2017.

Q What proportion of your allocations is invested domestically?

A For fixed income, 95% is invested domestically, although we plan to raise the international portion of our bond exposure. We made investments into global bonds through an external adviser this July, for example. As for equities, our team is dedicated to domestic equity. While just 13% is invested overseas at present, we plan to raise this to 23% by 2017.

Q How much of your assets is managed externally?

A About 40% of our $11 billion in AUM is outsourced. Domestic fixed income is mostly managed in-house and our internal team always outperforms managers we outsource to.

For equity, about a third is managed in-house and two thirds externally. Overseas investments in equity and fixed income are outsourced. However, our internal team does invest in dollar bonds issued by Korean financial institutions, which we class as overseas investment.

This practice started after the global financial crisis when some global credits became unusually cheap, so we took advantage of the environment. For alternatives we have an in-house team and we also use external managers.

Q How far down the credit curve can you invest?

A We cannot invest in any credit below BBB because we want to ensure that the bonds are safe and liquid. Typically we invest in AA or A rated fixed income securities. We are not allowed to invest in Korean high-yield bonds.

The market is not liquid enough and structurally it would be taking on too much risk. But for overseas investing, high-yield strategies could be an option for us.

We actually consider high-yield to be an alternative investment. We could do something there, but we would have to study it to make sure it is something we understood. Our alternatives team does sometimes invest in private debt strategies, however.

Q What are your staffing levels?

A We run a lean operation. We have just 30 staff in total, of whom 21 are investment managers and nine are strategists and support staff.

Q How big is your outsourcing team?

A There are six people in it right now. For quantitative evaluation, we use a third party called Zeroin. We do the qualitative assessment ourselves.

Q What mandates have you issued or are you looking to issue?

A We recently posted a request for proposal for active and passive equity and global fixed income. Aggregated the total amount is for $200 million. We made overseas investment through external advisers from June to July this year.

Q Can you outline your approach to alternative investments?

A Infrastructure makes up the largest portion at 35% of allocated capital. Private equity represents 30%, real estate 25% and commodities/others 10%. In terms of where we want to put our money, top of our list is overseas private equity and overseas real estate.

When it comes to infrastructure, for the last couple of years we have relied on Minimum Revenue Guarantee (MRG) projects, where the Korean government or another entity has provided a capital guarantee. One example would be highways. But many of these guarantees have disappeared now, so infrastructure investing in Korea is not looking as fruitful in the future.

Q What about hedge fund investing?

A We do not invest in hedge funds currently, but they are a possibility. Certainly we are more interested in the overseas hedge fund market because the Korean market is in its infancy. While exposure to Korean hedge funds would offer portfolio diversification, the market is still relatively small. There is no depth, so we will have to wait a little.

But there are plenty of good hedge fund players overseas that we would like to invest in. The overseas market is growing very fast and is well understood, which is one reason why we are thinking about hedge funds.

Performance has been poor in recent times, but if the environment becomes more conducive we could get things started. We have not made any decisions yet, but before the end of this year we could have made our first hedge fund investment.

Q Can you detail alternative investments you have made recently?

A We have completed two overseas real estate deals in the past year or so, one in Germany and one in the US. One was for an office building and the other for a commercial building.

For this year we are reviewing two things. One is a blind fund where we give external asset managers all the rights to invest. The other is for shale gas in the US.

There are some 20-30,000 companies [involved in the exploration and production of shale gas in the US], so it is a very competitive and efficient market.

In reality deal-sourcing is not something we can do, so our solution for now is to make investments through general partners.

Q What is the procedure for approving allocations?

A For domestic equity and fixed income investment, we do this internally, so this does not require investment committee approval. For alternatives we have a process where [capital commitments] have to be passed through two committees.

The first is made up of external professionals in the alternatives landscape.

The second comprises professors and academics – our client base – who offer a more macro-economic overview. To approve deals typically takes a month-and-a-half. For external manager selection, approval is only needed from one committee.

Q Asset owners have started to open overseas offices. Is this something you would consider?

A The idea of opening an office in New York or London is a good one and we could certainly use some kind of [market] watchdog outside of Korea. However, this would be a big departure for us. It is not high on our priority list.

Q Do you plan to change your internal structure?

A We plan to set up an overseas investment team and are hoping to recruit professionals with experience in overseas investing. We have hired three external advisers this year, two for equities (one active, one passive) and one for fixed income. We recruited an internal overseas investment professional and a strategist last year.

Over the medium-to-long term we want to in-source investments so that our outsourcing team will be dispersed. We aim to move staff in equity outsourcing into a direct equity investment team.

We want our domestic teams to be classified by asset class, and there to be a separate team for overseas investment. The same people will be with us, but they may be under a different team.