It might look like a normal leadership transition at KIC – as its chief executive officers only normally hold the baton for three years – but its eighth CEO Jin Seoung-ho is under “tremendous” pressure as he faces the double headwinds of inflation and the yet-to-be fulfilled alternative and ESG investment targets, experts told AsianInvestor.
The Korea Investment Corporation on Tuesday (May 18) welcomed its new CEO who has started his three-year term at the Seoul-based organisation, succeeding Choi Heenam, whose three-year term ended on Monday.
Previously, Jin led the presidential committee on Balanced National Development between 2019-2021. He also formerly headed international finance and international economic affairs bureaus at the Ministry of Economy and Finance.
“I will strive to lead KIC’s growth as a globally leading and respected sovereign wealth fund,” Jin said in his inauguration speech.
As a former finance ministry official, Jin is reputed to know the internal workings of KIC very well already.
However, the new CEO is likely to face “tremendous” pressure to keep up the momentum after two record years - 13.7% return in 2020, and 15.4% in 2019 - said Madrid-based Javier Capapé, director of sovereign wealth research at the Center for the Governance of Change and adjunct professor at IE University in Spain.
KIC’s net asset value stood at $183.1 billion at the end of 2020, but it has a long-term goal to grow its assets to $400 billion by 2035, according to Global SWF. The fund’s AUM has nearly doubled over the past five years from $91.8 billion in 2015.
Capapé told AsianInvestor that he will be looking closely at whether inflation-linked bonds and other fixed-income investment can boost KIC’s performance under increasing inflationary tensions in the second half of 2021 and 2022 onwards.
At the end of 2020, KIC had 84.7% of its portfolio invested in traditional asset classes. This included 42.7% in equities, 35.2% in fixed income, and the rest in other asset segments, including inflation-linked bonds and cash. The remaining 15.3% went to alternative assets.
However, Gary Smith, the managing director with Sovereign Focus, holds a different view.
The London-based expert thinks KIC’s target to double assets in the next 15 years is not particularly “ambitious”. It stands for an internal rate of return (IRR) of approximately 5% each year.
The interesting story will be how KIC can diversify its investments, from alternative assets to responsible investing, as it serves as a “lead actor and chief influencer” for the government of Korea, in terms of what other Korean investors should be investing in, especially in terms of climate change-related projects, Smith told AsianInvestor.
“Korea is an important country on the world stage. It can have a very influential role on its neighbours in terms of setting a good example. And within that story, for Korea, KIC should be taking on the role of a chief influencer,” he said.
Domestic companies and asset owners in Korea have come relatively late to making ESG a part of their agendas, with KIC establishing a basic framework for ESG investments just two years ago.
Former CEO Choi Hee-nam told local media recently that the lack of a unified standard has sometimes made it difficult to assess with any accuracy each Korean company's ESG practices.
At his inauguration ceremony, new CEO Jin stressed that KIC should invest with agility in a fast-changing investment environment and amid high market volatility, and strengthen responsible investment.
“KIC will continue to develop its responsible investment capabilities as the fund has the scale and scope to make a good impact on global economic sustainability,” he said.
The SWF observers note that KIC has a lot of ground to make up.
“The ESG commitment made [by KIC] is big in headlines yet small in total figures,” said IE’s Capapé, adding that he wants to see whether there will be a connection between alternatives growth and ESG-specific deals in renewable energy, smart mobility or on startups providing energy-efficient solutions.
“The fund will have to pick up the conversations around responsible investing - in our latest scoreboard, we rated their sustainability efforts with a 3 out 10 points, well below the global average of 5.1,” said New York-based Diego López, managing director of Global SWF.
He was referring to Global SWF's Governance, Sustainability & Resilience Scoreboard for Sovereign Wealth Funds and Public Pension Funds 2020, which was released on July 23 last year. The 2021 edition will be released on July 1.
According to KIC’s first green sustainability report released in June 2020, it plans to introduce solutions to monitor information such as ESG ratings and stewardship activities in its investment system. Such functions are expected to be launched this year.
"KIC has accelerated efforts to establish the ESG integration framework and investment system that meet the best global standard. The score does not reflect our achievement over the past year and we expect the figure for this year would be significantly higher, recognising [our] progress," a KIC spokesperson said.
KIC has performed well during the past six years, boasting an average annual investment return of 6.87%, compared to the global average of 6.22% and to National Pension Service’s (NPS) 6.04%, López told AsianInvestor.
“But it is also well known that the fund is struggling to increase its allocation to alternative assets from its current 15% to its target 25%,” he said, who’s also an external consultant of the World Bank.
The sovereign fund aims to raise allocation for alternatives to 20% by 2024, and to more than 25% by 2027, chief investment officer David Park told AsianInvestor in a webinar in January. Meeting that target will require Jin to strongly support Park.
“As KIC continues its expansion to alternatives…This requires a strong commitment since the proportion of alternatives has declined from 16.4% in 2018 to 15.6% in 2019. The alternatives bet is growing but the equities bet grows faster. Equities have grown from 35.3% in 2018, 40.8% in 2019 and 42.7% in 2020. Will it follow the trend?” IE’s Capapé said.
But he noted that KIC’s venture capital adventure will continue, with the opening of the San Francisco office in March 2021. “The test on its long-term value and contribution to the portfolio will be scrutinized,” he said.
KIC's previous CEO Choi planned a more agile decision-making process for new investments, with CIO approvals without CEO permission capped at $20 million. It is a fast-track procedure for startups below that threshold, Capapé pointed out.
So far, KIC's known venture capital (VC) investments include three post-IPO deals in cannabis-related US startups, as well as in ByteDance, the Chinese owner of TikTok, and a fintech company. “Let's see if we observe a consolidation of the VC strategy with the new CEO,” he added.
This article has been edited to include a comment by KIC, clarify a quote by Gary Smith and the date of release for Global SWF's latest Governance, Resilience and Stability Scoreboard for SWFs and public pensions.