Hunting yield amid domestic go-slow

The first credit cooperative in Korea was set up in 1963 to help local residents and small businesses that had difficulty obtaining bank financing because of their low credit status.

There are now some 3,000 cooperatives nationwide, providing local communities with financial services and various types of community activities. In terms of assets, the collective network has $110 billion overall.

The Korean Federation of Community Credit Cooperatives (KFCC) was established in 1973 to oversee the development of the credit cooperative system. It promotes advisory services, credit and insurance businesses, education and research, public relations and international cooperation.

KFCC effectively performs the role of central bank by controlling the liquidity of these cooperatives. Unlike under a typical commercial banking system, each CC and KFCC are independently owned and operated.

The federation also manages a $35 billion asset management portfolio, which comes from contributions and fees provided by credit cooperative members. It has seen AUM increase $7 billion since the end of last year.

Overall KFCC has 750 staff, all based in Korea. Jeung Jae-Ho is head of fund management and chief investment officer. He joined the organisation in July 2010, although he has an investment banking background, having previously worked for BNP Paribas and Shinhan
Financial Services.

Q Can you outline KFCC’s asset allocation?

A For our existing portfolio, 85% is in fixed income, entirely in the domestic market. We have no foreign fixed income yet. We also have 14% in alternative investments, of which 7% is structured finance and 7% real estate. The 1% balance is in the Korean stock market.

Within fixed income, more than 70% is in government bonds and the remainder is corporate bonds and commercial paper. We only have triple-A and double-A bonds now, issues from companies such as Samsung and Posco. The minimum bond credit rating that we can invest in is single-A.

Q What is your target return?

A According to our business, plan for next year it is 5%. But it depends on the market. In Korean fixed income we can only expect a return of 3%, while in structured finance we can expect 5-6%.

Q Does this mean you will be reducing your fixed income exposure?

A Yes, and increasing our exposure to alternative investments. I am looking to raise our exposure to real estate in particular. It is difficult to find good assets in Korea, that is why we went to the United States and bought buildings in New York, Chicago, Washington, Houston and San Francisco, the latter of which we have sold. We also have two or three buildings in London and are thinking about future purchases there.

But prices have gone up in both London and the US, making us more hesitant to buy. So we are looking to change our asset allocation, lowering fixed income exposure to below 80% and increasing real estate to 10% and domestic stocks to 2-3%.

We will also consider investing in overseas stock markets. We are aiming to raise our overseas investment from 5% to 10% next year. By the end of 2013 we will have fixed our strategic asset allocation plan for next year.

Q What has your return been for 2013?

A Just under 5%.

Q Can you outline your foreign exposures?

A We have invested in a Korean company listed on the Kospi called Kolao, which in itself is expanding in Cambodia and Myanmar. We support the firm so we have investments in those countries.

We are not investing in the firm’s equity. Kolao has a good business portfolio and we trust the management, so we co-invest and they offer us a guarantee. It is a bit like a mortgage. We are very conservative, so I can’t see any other way for us to invest in frontier markets.

Q What is your capital commitment?

A We made a $30 million investment with Kolao in 2012 and plan to double that to $60 million in 2014, although we have not fixed the exact amount yet.

Q What part of your portfolio does this investment fall under?

A Structured finance. KFCC’s only other foreign exposures are to the real estate market.

Q Will you look to add international fixed income?

A Yes, perhaps we will start early next year. We will look to invest in the US and European fixed income markets. Whether that is in government or corporate bonds depends on where investment banks see the opportunities. They engineer investments in the secondary markets and make proposals to us.

We are looking to buy good assets in the secondary market. In the case of direct investment, according to internal regulations, we are only allowed to invest in OECD countries, so frontier markets are not on our list. That is our policy. If we want to invest in other countries, we have to set up a fund internally.

We did this for China, where we created an internal fund. Even though the amount is not very big, it has been successful so far.

Q Will you eventually look to get a qualified foreign institutional investor (QFII) licence to invest in China’s onshore securities market directly?

A So far we haven’t done this; we have borrowed quota from investment banks. Our China fund is experimental and that is why it is just an internal fund at this stage. We started it in 2012 and it is $50 million in size, investing mostly in Korean companies with China links and exposures.

Q Do you plan to make similar investments in other markets?

A In fact we are looking at a project in Africa (see page 82). We plan to partner a technology solutions provider in the banking sector that focuses on the distribution of credit cards. It, too, is listed on the Kospi.

We are looking to set up a company with them to capitalise on consumer banking expansion in Africa. We plan to invest about $50 million at the start, and our partner will commit perhaps $10 million.

Q You see Africa as a promising growth market?

A Banks in the developed world already have such technology solutions, but Africa is different. Our partner has made contact with numerous banks there. If they can secure contracts, we will commit the money and we can begin this project. We know there are other promising sectors in Africa, such as telecoms. But our plan is to look at banking, which is easier for us to understand.

Q How do you set your asset allocation?

A We have three committees: risk management, investment and asset allocation. I control investment and asset allocation.

Our strategic asset allocation is set once a year; we then stage allocation meetings every month. I can call an investment committee whenever needed, which varies from every week to once a month. It depends on the situation.

But we have to explore new business opportunities continuously. I discuss these with securities companies and investment banks – that is my job. We study the projects and then decide whether to invest.