KIC’s next CIO likely to be a Korean

Scott Kalb’s three-year contract as chief investment officer at Korea Investment Corporation expires at the end of March and will not be renewed.

For much of Kalb’s tenure, industry executives in Seoul had speculated that the American might be retained for another term. Sources say Kalb would have been willing to stay on.

However, the silence from KIC’s two shareholders, the Bank of Korea and the Ministry of Strategy and Finance, became deafening, and it has recently become clear that no such offer would be forthcoming.

[Kalb will leave his successor with, among other things, a licence from Beijing as a qualified foreign institutional investor, which the $45 billion KIC first applied for in 2010. The approval was granted on Friday and follows one given to the $310 billion National Pension Service earlier this month. BoK also has an outstanding application.

[According to the MoFS, KIC received a licence in December from the China Securities Regulatory Commission. KIC requested a $200 million quota, but the final amount and timing is up to China's State Administration of Foreign Exchange. If things go smoothly, KIC could be investing into Chinese stocks by July.]

Industry executives in Seoul say it would have been unusual to have an appointment such as Kalb’s extended. These decisions are political and have little to do with performance.

As Kalb explains to AsianInvestor: “The CIO of the KIC is also the deputy CEO of the firm. While it is theoretically possible for the CEO or deputy CEO of a public company to have their contract extended, in practice there are zero cases of this occurring when it comes to financial institutions.”

One senior official at BoK told AsianInvestor he said it was a mistake for the government not to extend Kalb’s contract, because in his opinion the CIO has done a good job. “But it’s the same reason why you see a new CEO at the NPS every two years,” he notes, referring to the National Pension Service. He says the politicisation of senior investment roles continues to be a drag on performance: “It hinders our ability to set a long-term investment strategy.”

Most industry officials questioned by AsianInvestor agree that Kalb has been good for the organisation, but the local media has soured on him.

This is an important election year in Korea, with the National Assembly vote in April followed by the presidential election in December. From the presidential Blue House on down, there is no incentive to back an unpopular entity.

The KIC has come under renewed criticism by several big newspapers for its decision to add to a $2 billion stake in Merrill Lynch, which was initially taken by Kalb’s predecessor, Guan Ong. On paper, the unrealised loss at one point reached $900 million.

Kalb preferred to add another $100 million to the Merrill position (now Bank of America Merrill Lynch) in early 2011 when share prices were low, betting on a US recovery, rather than sell and realise a total loss.

KIC’s overall investment performance has also been attacked. Newspaper articles in Korea are comparing it unfavourably with the 2011 performance of NPS. The NPS eked out a 1.9% return over the course of 2011, versus a -3.3% loss by KIC. (This does not, however, recognize that KIC does not report the performance of its private investments, which Kalb describes as "double digit returns". Alternatives comprise about 10% of total assets at KIC.)

However, local media have failed to explain (or understand) that, by law, KIC must invest outside of the country. In 2011, Korean equities outperformed global risk assets so naturally this buoyed the performance of domestic-oriented institutions.

Moreover, on a three-year basis, KIC has outperformed most pension funds and sovereign wealth funds. Its three-year annualised return of 3.2% is among the top 5% of 232 such organisations. (Kalb disputes this figure and says it is more than double that, around 7.6% per annum on a compounded basis.)

The accumulated impact of these criticisms, however, has been to undermine support for having a foreigner run KIC’s investments. So far, no names as to a possible successor to Kalb have surfaced, but industry executives all expect the job to go to a Korean.

This should not have a practical impact on KIC’s investment operations. KIC was launched by the Roh Moo-hyun presidency in a bid to copy Singapore’s Government Investment Corporation and attract global money managers to set up shop in Korea. The idea was to transform Seoul into a global financial centre. It soon became obvious that merely launching a sovereign wealth fund was not going to be enough.

By then, however, BoK’s foreign exchange reserves had begun to crest, and KIC’s raison d’être shifted to managing a portion of those reserves for a higher return.

With initial seed capital of $20 billion, however, the Roh government had been concerned both about a lack of experience among Koreans to manage such a venture, as well as the possibility or perception of corruption over how such a honey pot was doled out.

So it was decided to hire a foreigner, and Guan Ong took the job. He was Malaysian and had a long career in investment banking and research, but also knew Korea, having run Prudential Financial’s new Korea business for a stint. Guan set up the basic infrastructure and made early moves into global public securities, as well as the fateful 2008 BoA Merrill stake.

Kalb had run a hedge fund in the US and had served in the Peace Corps in Korea. He has used his tenure to continue to build internal teams, and to diversify KIC’s portfolio across the credit spectrum, going into areas such as distressed assets and secondary private equity.

Meanwhile, KIC’s presidents, including recent appointee Choi Chung-suk, have helped to smooth relations with its biggest shareholder, BoK, and the organisation goes into its seventh year with a more established culture and infrastructure. Moreover, there is a larger pool of domestic talent with enough experience to run KIC’s portfolio.

Guan Ong went on to establish a credit hedge fund in Singapore, Blue Rice Investment Management. Kalb would not comment on his immediate plans, other than seeing out his term until it expires in March, but industry executives in Seoul expect he could land a good investment or advisory role in Asia if he wants to remain in the region.

Whoever takes on the CIO role at KIC, meanwhile, will find the heaviest lifting has been done – although if the past two examples are any guide, they will probably assume the job in a fit of welcoming applause and leave two or three years later under a storm of criticism.

This story has been updated to reflect Kalb's comments regarding KIC's investment performance.