Korea Post’s savings division plans alternatives push

Korea Post Savings Fund has a 4.4% target investment return for 2011, ambitious enough to require it to gradually increase its exposure to risk assets.

This means the institution will look to add equities and alternative investments to the portfolio mix, says Jung Jong-yong, CIO of the postal savings fund management team. He was speaking last week at AsianInvestor’s fifth annual Korea institutional investment forum in Seoul.

Jung says the $52 billion institution, which is separate from Korea Post Insurance Fund, must generate $2 billion or more of profits from its investments annually. The insurance fund has traditionally been a more aggressive investor, thanks to its longer-term liability profile.

However, as a deposit-taking institution, the savings fund must be very cautious with its money, with liquidity and safety the drivers of its asset-allocation decisions. As of June, 93% of its assets are categorised as ‘safe’ and 7% as ‘risky’. It invests 70% of its assets directly and outsources the other 30%.

The group’s move to boost its risk-asset exposure is partly driven by global and local economic conditions. Korea Post’s deposits and cash inflows are linked to domestic interest rates. The global outlook is uncertain, with fears of a return to recession among developed countries, and domestic investors can’t expect to match the same kind of high returns they’ve enjoyed recently.

Given rising interest rates in Korea, the savings fund has begun reducing its exposure to Korean fixed income. However, Jung says market conditions may prompt a return to net buying of local bonds because interest rates seem to have stabilised.

Although domestic equities can provide better returns, the local stock market is also volatile, so there is a limit to which Korea Post can invest in it. Jung says alternative investments can provide a source of stable income-generating returns instead.

Today the fund already invests in eight foreign private-equity funds and 10 local ones. Jung suggests it may add managers and will consider allocating to foreign hedge-fund managers.

Korea Post’s savings division has already reported investing about $50 million in Japanese equities and $100 million in commodities in the first half of 2011, and it has another $200 million budgeted for alternatives this year.