How KIC creates value beyond asset performance
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The Korea Investment Corporation (KIC) is showing that an asset owner’s value can be measured in more than returns.
South Korea’s sovereign wealth fund is using the knowledge it gains by investing across the globe to improve the investment education and sophistication of public investment institutions, sources familiar with its operations told AsianInvestor. And it is aiming to do more of it.
“As a global investor, KIC is very sophisticated, but it also adds value by sharing knowledge with other public entities and government bodies,” said an advisory firm head familiar with the working of KIC’s investment division, who spoke on condition of anonymity.
The advisory firm head said KIC offers much more value than investment returns alone. In part this is due to Korea’s corporate culture.
Investment professionals at state-linked investment organisations typically get rotated into new positions at other public investors every two to three years. As a result a new portfolio manager can step in without any specific expertise on the asset class in question.
“These investment professionals need knowledge, and they can get [that by] sparring with KIC who has strong inhouse research and investment capabilities, especially due to its overseas offices,” the advisory firm head said.
“KIC has general continuity in their investment team, so that means that they have investment specialists, for instance in overseas real estate. They also have an extensive network among overseas asset managers, and experience doing business with them,” the head added.
As KIC is engaged in talks with peers globally, they are prioritising responsible investments and sharing their knowledge on that area
The sovereign wealth fund typically uses a set of conferences and forums to proactively bring investment and asset information to these local entity executives. This includes areas that have yet to gain popularity in the country.
“As KIC is engaged in talks with peers globally, they are prioritising responsible investments and sharing their knowledge on that area,” said the advisory firm head. “This especially involves ESG [environmental, social and governance], but also in a broader context.”
The focus makes sense, given that ESG commitments in Korea are somewhat lagging those of other nations.
KNOWLEDGE SHARING
One key talkshop created by KIC is the Public Community for Overseas Investment (PCOI). KIC launched the initiative in April 2014 to support the development of the domestic finance industry – one of its intended missions.
PCOI is held on a quarterly basis, and its 24 institutional members include domestic pension funds, mutual aid associations, cooperative federations and other public investment institutions. It's proving to be a useful place for KIC to help members learn how to better invest internationally.
“KIC will continue to cooperate with and strengthen our support for the PCOI’s growing membership ... to help boost the overseas investment performance of the public sector,” a KIC spokesman told AsianInvestor.
The sovereign wealth fund is also involved with similar initiatives overseas with the International Financial Cooperation Council, through its offices in New York, London and Singapore. KIC plans to use the initiative, which started in 2017, "to strengthen this to better share global financial market trends and promising joint investment opportunities,” said the spokesman.
KIC’s efforts to expand these forums comes at a time when it is investing capital on behalf of a growing set of organisations
KIC’s efforts to expand these forums comes at a time when it is investing capital on behalf of a growing set of organisations.
When it was established in 2005, the sovereign wealth fund only received capital from the Ministry of Finance and Bank of Korea. But last year KIC added further entities to that list.
On February 21 2019, it signed a memorandum of understanding (MoU) with Korea Post to co-operate on investments. Sejong city-headquartered Korea Post falls under the Ministry of Science and Information and Communications Technology.
Furthermore, KIC also inked an MoU with the National Federation of Fisheries Cooperatives and the National Agricultural Cooperative Federation on May 13 and May 16, respectively. The sovereign wealth fund will also keep working to attract funds from mutual aid associations, cooperative federations and other public investment institutions, the spokesman told AsianInvestor.
The spokesman declined to comment on whether KIC has started making investments for these entities and if so in which asset classes, stating that it does not disclose details about specific investment deals or plans.
Meanwhile KIC is building its own overseas capabilities. It will launch an additional office in San Francisco this year, according to Choi Heenam, CEO and chairman at KIC. It intends to use the office to improve its deal sourcing capability for technology start-ups and other alternative assets.
STRONG PERFORMANCE
While KIC’s information sharing is valuable for its peers, investment performance remains the crux of its purpose. And in this respect it did well last year.
The sovereign wealth fund announced a preliminary total rate of return of 15.39% for the year, chief executive officer and chairman Choi Heenam said at a press conference on February 6.
According to the preliminary result, KIC increased its assets under management during the year by $20 billion, bringing its total AUM to $157.3 billion at the end of December. This would mark its highest annual AUM gain since its establishment in 2005, although it enjoyed better performance in 2017 with a total rate of return of 16.42%.
The preliminary result marked a big improvement on the negative return of 3.66%, or loss of $5.1 billion, that it recorded a year earlier. However, both results were especially influenced by the equity markets, KIC pointed out. Its overall return on traditional assets rebounded to 16.62% last year, with a return of 27.52% on equities and 7.53% on fixed income (see note 1 below for more details on asset breakdown).
KIC was able to report the strong returns despite changing its investment head. On August 5, it appointed Park Dae-yang, also known as David Park, as chief investment officer the sovereign wealth fund said on August 5.
As described by AsianInvestor in June, Park was chosen for the three-year position among a dozen applicants in June and then underwent background checks. Park is also KIC’s first CIO with experience as head of investments at a pension fund, having previously been the CIO of Teachers’ Pension since January 2017.
Note 1: According to Korea Investment Corporation’s preliminary result for 2019, its asset breakdown at the end of the year comprised: 40.8% equity (35.3% at end-2018), 35.5% fixed income (36.7% in 2018), 15.6% alternative assets (16.4% in 2018), and 8.1% in others, referring to inflation-linked bonds, commodities, cash and others (11.6% in 2018).