POBA tweaks asset strategy to focus on income generation
South Korean pension fund the Public Officials Benefit Association (POBA) has adjusted its strategic asset allocation for a year of ongoing global economic uncertainty.
According to Huh Jang, POBA's chief investment officer, asset owners are navigating unchartered waters and an unprecedented market environment, requiring them to brace for the impacts of negative market developments and worsening fundamentals.
Huh has asked his teams to reconsider their portfolio stance and increase the portion of income-gain assets such as bonds and loans.
He has requested the same for dividend-yielding assets such as listed real estate investment trusts and infrastructure.
The clear aim is to achieve stable cashflows from POBA’s assets.
“We don’t have to depend on marketable assets, such as highly volatile assets like listed equity," Huh told AsianInvestor.
"We should focus on stable, cash-generating assets such as bonds and loans, That's the top priority I have emphasised this year.”
The pension fund is also keeping an eye on its liquidity management.
After a liquidity hit last year, it has placed a strong emphasis on establishing an appropriate level of liquidity internally, even though this year has so far shown some improvement in terms of that challenge.
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“I also emphasize introducing asset liability management similar to insurance firms’ investment management schemes, along with liquidity management, as part of our portfolio management," Huh said.
"It means that we must consider the characteristics of liability on the fund side when it comes to constructing our portfolio.”
As of the end of last year, POBA’s total assets under management stood at KRW21 trillion ($15.7 billion).
Despite a challenging 2022, the fund managed a positive return of 3.8% for the year, lifted by its relatively high share of alternative investments, which made up nearly 78% of its portfolio at the end of 2022.
NO RATE PIVOT
Huh said several factors had made him wary about the outlook for this year. Despite positive sentiment in equity markets during the first part of the year, he said markets still showed signs of instability.
And despite the fact that inflationary pressures have eased significantly, with some market actors expecting the US Federal Reserve to pause interest rate increases and perhaps even pivot during the second half of 2023, Huh remains cautious.
“I expect that even though the Fed has almost reached the peak of its [rate] hike policy, we shouldn’t expect any pivot anytime soon," he said.
"I think the Fed is willing to maintain interest high at a certain level for the time being, maybe until the end of 2023 or 2024, longer than the market expects. In these times [and in an] uncertain environment, what I highlight in terms of investment decision-making internally at POBA [is a] conservative investment stance.”
TACTICAL OPPORTUNITIES
Uncertainty is not all bad news. Given volatility on equity markets, POBA will try to adapt its tactical asset allocation to take advantage and make profits.
“In the longer term, I emphasise that it's very good timing for us to accumulate very deeply undervalued assets from this market turmoil situation," Huh said.
"From those efforts we need to strengthen the profit potential in our portfolio in the long term.”
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At the same time, Huh says it is important to reduce currency hedging costs, so the fund wants to flexibly change its hedging position across sectors.
DON'T BET ON CENTRAL BANKS
Although the current market has weighed on tactical opportunities, it has encouraged POBA to maintain a conservative investment perspective.
Huh said investors needed to avoid rash, contrarian approaches that in his view had become universal. He said that in recent decades, many investors had become accustomed to central banks acting to boost markets during any difficult period.
“Investors have become very familiar with a contrarian approach, similar to Warren Buffett’s approach.
"But right now, I will warn against such a risky approach and be very cautious. We need to have a very careful approach to making investment decisions,” Huh said.
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Whether the current economic situation leads to a recession, or whether inflationary pressures ease, Huh expects interest rates to fall, maintaining fixed-income as a preferred asset class for POBA.
“We see the best investment opportunities in fixed-income rather than equities," he said.
"The equity markets’ performance will be relatively uncertain and very volatile. The attractiveness of bond investments is the No.1 opportunity this year.”
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