Korean Teachers’ Pension finds tactical investments amid 2023 turmoil
Although financial markets have shown much volatility in the last 18 months, Teacher’s Pension in Korea is set on finding value where it can.
Opportunities both in fixed income and private debt have been considered, and for the remainder of the year, equity possibilities within private equity will also be explored, according to Lee Kyu-hong, chief investment officer at Teachers’ Pension.
“After interest rates increased sharply starting from last year, it was a great opportunity for us to be able to buy blue-chip corporate bonds,” Lee told delegates at AsianInvestor’s 15th Institutional Investment Forum Korea in Seoul on June 23.
In terms of alternative investments, Teachers’ Pension has been putting priority on private debt — specifically, distressed situations and direct lending strategies.
“When we select alternative investment blind funds, we focus on the funds that use relatively less leverage and have a covenant that could reduce downside risk, especially with private debt blind funds,” Lee said.
For the latter half of 2023, the overall framework will be similar to the fund’s mid- to long-term plan, supplementing the already achieved allocations in the first half of the year.
“In terms of alternative investments especially, we will focus more on equity rather than loan or debt,” Lee said.
PROFITABLE EQUITY
According to its five-year plan, Teachers’ Pension plans to shake up its portfolio mix by increasing the share of alternatives, which stood at 25% of a total AUM of W23.2 trillion ($18.1 billion) by end-May 2023.
While domestic alternatives will remain at roughly 10% of total AUM, overseas alternatives are projected to grow from 14.3% to 19% to bring the total share to 29% by 2027. Whereas more overseas alternatives allocations are providing diversification perks, shares of domestic fixed income and overseas equity are simultaneously expected to take up less space in the portfolio.
In November 2022, Teachers’ Pension sent out a request for proposals (RFPs) to manage mandates for trading global equity and ETFs for the fund in 2023, to a total of six firms. Teachers’ Pension has not disclosed the selected managers that were also chosen in November 2022.
“Many will agree that the global equity market is doing much better than initially expected earlier this year. So, for our mid- to long-term allocation, we realized we are sufficiently positioned within equity, and we are already benefiting tremendously from the bullish equity market,” Lee said.
Previously, in 2022, Teachers’ Pension had shored up its equity mandates with an overseas mandate for active equity management in September.
UPS AND DOWNS
The 2022 turmoil in both the equity and fixed income markets also hit the Teachers’ Pension’s portfolio with a total negative return of 7.75%, or 50 basis points below benchmark. This was despite a positive return on alternatives of 8.28%.
For the long-term investor, however, last year’s negative return was a calculated risk in asset allocation strategy. Indeed, Teachers' Pension delivered returns above 11%, each year for the previous three years, beating benchmarks.
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This year, TP is quickly making up for last year's losses. The cumulative return on investment (time-weighted basis) from the beginning of this year to the end of April was at 8.27%. This is roughly on par with the benchmark return of 8.28% over the same period.
As of end-May, Teachers’ Pension’s total AUM was W23.2 trillion. That was split between 34% bonds, 40% equity, 25% alternatives, and 1% cash assets.
TOP-TIER MANAGERS
As the share of alternatives is projected to reach 29% by 2027, the pension fund aims to be consistent on its split with 30% real estate, 30% infrastructure, and 40% private equity. The latter includes private equity, private debt, and venture capital.
“For our alternative investments, we do It through flagship blind funds managed by global top-tier companies,” Lee explained.
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Lee joined Teachers’ Pension as CIO in October 2019 for a two-year term and has since received one-year extensions twice from the board, a nod to his accomplishments.
The fund is serving just over 440,000 (440,027) members, of which 24.29% (106,896) are pensioners. The fund works with 5,689 school institutions and covers members employed at Korean schools, ranging from kindergartens through universities — with a large majority employed at the latter.