Korea's POBA renews investment strategy to prioritise income, private credit
The Korean Public Officials Benefit Association (POBA) has adopted a new strategy to enhance the income-generating assets within its portfolio, highlighting five key investment themes for 2024.
“We are focusing on a barbell approach portfolio from this year onwards. Some 70-80% should be allocated to income-generating assets, like fixed income and private credit, that provide stable dividends,” Huh Jang, chief investment officer at POBA, told AsianInvestor.
The remaining 20-30% will be allocated to equity investments in both public and private markets, including venture capital, to achieve long-term growth, he added.
While the barbell investment strategy is typically used for fixed income portfolios, POBA’s approach uniquely incorporates private credit. As a result, the asset owner is placing significant emphasis on private credit in 2024.
“Private credit is the number one priority. Private credit’s risk-adjusted return is quite attractive compared to public fixed income. It is an all-weather asset class; it tends to perform well compared to other asset classes when we diversify underlying assets and when we choose capable GPs,” Huh said.
The barbell strategy derives its name from its structure, which resembles a barbell: it heavily weights bonds or income-generating assets at both ends of the maturity spectrum, with minimal or no allocation to intermediate holdings.
As of the end of 2023, POBA managed assets worth W24.4 trillion ($18.2 billion).
AI EQUITIES
POBA is acutely aware of the retreat by commercial banks from certain segments of the corporate lending market, driven by the need to meet regulatory capital requirements, Huh explained. As banks continue to offload credit exposure from their balance sheet, the demand for private financing is on the rise.
“It is almost a symbiotic relationship between private credit managers and banks. Private credit managers help banks streamline the balance sheet to match regulation requirements, and then, as an asset owner, we need to take advantage of this new opportunity of asset-based lending and specialty financing,” he said.
The second major strategy for POBA in 2024 is to capitalize on the rise of artificial intelligence (AI) by expanding its equities portfolio to align with this trend.
“The AI technology revolution is reminiscent of the internet’s introduction back in the mid-1990s. From 1994 and until the dot-com bubble burst in 2000, a dramatic change happened in the stock market. We need to capitalise on this secular growth through investing in the high-growth tech sectors, including related areas like semiconductors and AI-related infrastructure,” Huh said.
While the primary focus remains on income generation, the current low level of equities exposure allows room to expand and capture the long-term value in targeted sectors like AI.
“We need to construct a core equity portfolio. Our plan is to go from an equity exposure of 6.5% as of end of 2023 reach an expected increase of up to 10% by the end of this year,” Huh said.
PE AND REAL ESTATE
As of the end of 2023, the lion’s share – 72.3% – of POBA’s portfolio was invested in alternative investments. The public pension fund continues to prioritize private equity as its third strategic investment focus for 2024.
“We see private equity and venture capital as sectors with a profit potential for our portfolio in the longer term because this current vintage is quite attractive. Targeted strategies are the emergence of AI, biotech, healthcare and energy transition. These are all huge agendas in the coming years, and we want ride on that secular growth,” Huh said.
Real estate, another alternative sector, is POBA’s fourth strategic focus for 2024. The office asset sector, traditionally a cornerstone of real estate investment, has faced challenges due to changing work cultures post-Covid-19 and rising interest rates. However, POBA is looking beyond the mainstream real estate strategies, as these are already well represented in its portfolio.
“The hybrid working culture seems to be entrenched in the US and Europe, but we will further differentiate geographically and into subsectors this year. We focus on niche sectors such as student housing and nursing homes, which look to be attractive relative to other subsectors,” Huh said.
POBA’s fifth and final strategic focus for the year also relates to real estate but is centred on buying stocks in listed real estate investment trusts (REITs). In 2023, the pension fund increased its global REIT exposure at what Huh described as “a very cheap price”. Huh continues to see opportunities in REITs as they also help boost equities exposure.
“When we compare private real estate and public real estate, the public real estate prices decreased a lot more than in the private real estate market. We try to take advantage of that dislocation, and we continue to buy public real estate through REITs investments,” he said.