Korean asset owners adjust strategies as higher rates persist
Korean asset owners see the higher-for-longer interest rates environment as both challenging and beneficial for their allocation strategies, delegates heard at AsianInvestor’s 16th Institutional Investment Forum Korea in Seoul.
“High interest rates lead us investors to allocate capital to high yield assets, but we need to, on the other hand, protect ourselves against risk, so we will strengthen our high yield portfolio going forward,” Lee Sang Hee, chief investment officer (CIO) of Military Mutual Aid Association (MMAA), told a panel discussion of the forum on June 21.
Moderated by Jang Dong Hun, a senior advisor at law firm Yulchon and member of AsianInvestor’s Editorial Advisory Board, Lee and fellow panellists discussed how they are navigating the ripple effect of high interest rates that have persisted longer than many expected.
“As interest rates increase, we need to reflect this in our payments, so our burden has been exacerbated. Therefore, this issue has to be reflected in our operations,” said Jun Beomsik, CIO at Teachers’ Pension.
To mitigate the potential burden of higher rates and inflation on its members’ savings, the pension fund for employees at Korean private schools will reconsider its portfolio construction.
“Until now, we have been contracting safe assets to increase risk assets, but I believe that we have neared a completion of the portfolio to a certain level,” said Jun, who assumed the role of CIO in December 2023.
WIGGLE ROOM
For fixed-income-focused investors like life insurance companies, higher interest rates create a favourable environment where the relatively stronger returns on long-term bonds leave some wiggle room for other parts of portfolios.
“Compared to the past, there is more leeway to be flexible with allocation strategy. Looking from the bond perspective, we would reduce our alternative investments but increase equities to pursue high returns,” said Hwang Seong Bae, CIO at DB Insurance.
He emphasized that regulations are relatively stricter for insurers compared to other asset owners, so a certain level of long-term bonds must be maintained in their portfolios.
However, while regulations require insurers to maintain a prudent risk profile, their risk appetite is also benefitting from the higher interest rates. As DB Insurance and its peers can currently add relatively higher-yield fixed-income assets to their portfolios, the value and share of this asset class will be boosted.
“As the fixed income size increases, it will strengthen our solvency, and then we can also increase our risk outside fixed income, so that's a virtuous cycle to have more flexibility in our strategy,” Hwang said.
SEEING CHANGES
Previously, when interest rates were low, Teachers’ Pension adopted a strategy of contracting bonds and safe assets in favour of riskier assets. This included an increase in equities and a higher allocation to overseas assets as Korean assets were reduced.
Although higher interest rates have not yet negatively influenced equity markets as much as some feared, Jun stressed that the impact of macroeconomic trends is closely monitored.
“Overall, the fundamental system has to be improved in order to support the operation of our pension fund,” he said.
Teachers’ Pension has a five-year plan aiming to ramp up alternative investments. Jun plans to focus more on private debt as part of this increase, given the current higher interest rate environment.
NOTHING LASTS
MMAA’s Lee noted that in the early 2010s, when interest rates were relatively low in places like the US, there was a widespread belief that higher rates would never make a comeback.
“But in less than a decade, we're saying that we will now never experience that low rate situation in the future. So, in the long run, no one can predict rates,” Lee argued.
He believes the current problem is that the notion of low rates being a thing of the past is fuelled by lower-than-expected delinquency and default rates in the US.
Lee attributed this to the abundance of market liquidity, as interest rates were kept low, and markets got a boost first following the global financial crisis and then to ensure stability during the COVID-19 pandemic.
If governments start to further rein in excess liquidity, he is concerned about an unforeseen shock in the debt market. Thus, MMAA is treading carefully on future allocations of a portfolio with 74% of assets allocated to alternative investments.
“In the end, we will have to look for the GPs with great track records to make selective investments,” Lee said.