KIC commits to 'all-weather' strategy in portfolio rejig
Korea Investment Corporation (KIC) plans to focus on stabilising its portfolio as it bets on continuing volatility in global markets.
The sovereign wealth fund last year introduced a new, so-called “strategy asset” platform with a focus on achieving stable, absolute returns, its chief investment officer, Lee Hoon, told delegates at the opening of AsianInvestor’s 15th Institutional Investment Forum Korea in Seoul on June 23.
“Unpredictability is the new norm,” Lee said on stage, explaining why KIC decided to act on this new paradigm.
“We recognized the importance of diversifying our portfolio to include this new asset class.”
In response to the high inflation and high volatility regime, KIC launched the absolute return strategy platform “Strategic Asset” in 2022.
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The core objective is to achieve annual returns of cash plus an additional 2-3% while reducing portfolio volatility. KIC aims to accomplish this target by combining multiple assets with specific characteristics to maximize diversification and pursue stable returns.
“We commit to conducting a so-called all-weather strategy that incorporates various assets with distinct functions. This approach is designed to effectively manage risk and generate stabile income regardless of prevailing market conditions,” Lee said.
As of end-2022, KIC’s assets under management (AUM) totaled $169.3 billion.
UNPREDICTABLE NORM
The new platform was introduced following years of unusually unpredictable markets, Lee explained.
Starting with the Covid-19 pandemic outbreak, one event after another seemed to create large discrepancies between market forecasts and actual outcomes, he said.
“The economic and financial markets have constantly been proving market consensus forecasting wrong, making it more difficult to have confidence in economic and financial markets outlooks and the investment decisions. It is now necessary to recognise uncertainties as the new norm,” Lee said.
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Since early 2023, there have been concerns about a hard recession originating in the US, but also hope for a softer landing. Lee pointed out that even a scenario where a recession could be avoided entirely has been proposed recently.
“Investment decisions will greatly differ depending on how the future economic landscape is assessed,” Lee said about investor sentiment.
EXPECTS SOFT LANDING
Currently, KIC has a relatively optimistic view on the development of markets.
“We overall support the outlook for the soft landing despite the prevailing uncertainties,” Lee said.
The sovereign wealth fund’s support is especially rooted in robust employment and household income growth in the US, contributing to the resilience of the economy even in the face of the tightening monetary policies.
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In particular, US wages remain at high levels, while headline inflation has decreased, resulting in favorable income growth. Inflation driven by wage increases needs to stabilize for a soft landing, Lee pointed out.
The CIO recently met the management of a mid-cap buyout asset manager which manages more than 300 private equity companies in its US portfolio. The message was that wage increases have clearly decelerated in the past 3 weeks.
“Although it is difficult to assert that these data points represent the entire US job market, it is certainly noteworthy news,” Lee said.
BANK ISSUES WELL HANDLED
The KIC CIO also highlighted cases of effective and swift response from the policy authorities as another reason why the sovereign wealth fund expects a soft landing.
Lee pointed out that the current persistently high interest rates will inevitably lead to ongoing issues in the weak links of the economy. He pointed out the Silicon Valley Bank (SVB) and Credit Suisse issues in March as noticeable examples.
“It is important to highlight that policy makers effectively tackled these issues over the weekend between the end of the business hours on Friday and the opening of financial markets on Monday morning, thereby mitigating market confusions,” Lee said.
“The handling of the SVB and Credit Suisse issues in March have increased overall market participants’ trust in policy makers and the prevention of systematic risks.”
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In the face of uncertainties, the KIC CIO underscored that there is no single, correct answer for investment strategies and that market consensus had turned out to be wrong over the past few years.
“Therefore, it is very important to focus on the investment executions based on critical analysis rather than being swayed by the market consensus,” Lee said.
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