Korea’s POBA reveals investment targets for remaining 2023
The market outlooks for second half of 2023 offers both investment dos and don’ts for Korean Public Officials Benefit Association (POBA), whether it within debt or equity across public and private markets.
With higher interest rate environment, proactively responding to this ought to be very important for all long-term investors, according to Huh Jang, chief investment officer at the mutual aid association.
“We need to actively utilise the high interest rate period. We need a restructuring of the portfolio at the high interest rate, and we need to focus on managing liquidity at the same time,” Huh told delegates at AsianInvestor’s 15th Institutional Investment Forum Korea in Seoul.
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To do this, the CIO and his team has identified investment targets across asset classes. A priority will be credit in both public and private markets. After almost 15 years of unappealingly low interest rates, Huh sees an appropriate level of margin for blue-chip corporate bonds, especially in the Korean domestic market.
“We see a great opportunity to invest rated won-denominated bonds related to financial holding companies rated above A, and mortgage-backed securities,” he said.
For private debt, POBA could enjoy a great yield within the senior-level investments. The same goes for real estate debt, although Huh recognised the notion of challenges for especially retail and offices.
“But if we skilfully utilise these opportunities, we believe real estate debt - including subordinated, mezzanine and the multifamily development sector – provides a great vintage when we are able to manage the risk,” Huh said.
EQUITY AMBITIONS
For listed equity, by end-2022 POBA had less than 4.8% of the total AUM of W21 trillion ($16.13 billion), which had risen to over W23 trillion by June.
With the changed macroeconomic situation, however, Huh said he sees an opportunity to increase the portion of listed equity in the portfolio.
“Recently, except for the big tech stocks, we have value stocks and healthcare stocks that are values at a relatively low level. I think these are niche markets that we could look into,” he said.
Huh emphasised that POBA will “of course” selectively invest in tech stocks but said he found “overrun, big-tech” stocks among the more riskier assets currently.
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The CIO pointed out that especially in terms of private equity and real estate, POBA must be able to actively leverage vintage. Likewise, he noted that private equity has been providing great performance, so sentiment-wise it might appear to be an unfavourable market.
“But we will still focus on private equity, and especially secondary and special situation strategies could be handy,” Huh said.
In general, POBA’s regional exposure has been heavily focused on the US and Europe. That bids Huh and his to diversify, and the CIO sees both potential and a need to look closer at Asia beyond Korea.
“We especially need to focus on the trend of decoupling with China. There are countries like Japan and India that have been neglected but are rising these days where we can approach in terms of equity investments,” he said.
THREE PRIORITIES
As interest rate hikes have occurred in developed markets, investing in debt has been more favourable than other equity assets for POBA.
Going forward, the inflation could be curbed, potentially leading to economic slowdown. Regardless, Huh sees a high likelihood of interest rates being stabilized. To handle credit risk, the mutual aid association has largely three strategic investment priorities.
“First of all, we will pursue a return level with equity-like returns and bond-like risk. At this level we are going to focus on private credit that generates income,” Huh said.
Also read: POBA tweaks asset strategy to focus on income generation
The second focus is managing liquidity. Towards the end of 2022, Korea experienced a liquidity crunch, teaching Korean long-term institutional investors like POBA “a great lesson” about the importance of liquidity management, according to Huh.
“We need liquidity as a contingency plan that can be liquidated when we need to pursue high returns,” he said.
Also read: POBA sold assets, tweaked hedging to weather 2022
Therefore, POBA is focusing more on collateralized loan obligations (CLOs) or commercial mortgage-backed securities (CMBSs) in the real estate market, listed real estate investment trusts (REITs) or listed infrastructure that are asset-backed securities (ABSs) or securitized assets.
The third focus is on price dislocation. Huh pointed out that although the financial markets are relatively stable right now, they could face a crisis anytime in this high interest rate environment – especially with the real estate market as the catalyst.
“A such crisis would lead to assets with dislocated prices so that is why we need to utilise price dislocation strategy, and we would use the vintage features as a special strategy,” Huh said.