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Performing Well
The Korean sovereign fund has been successfully operated overcoming the difficulties at the establishing stage and during the subprime crisis
Performing Well
  • By matthew
  • March 4, 2011, 18:15
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In the early stage of establishment, the Korea Investment Corporation (KIC) faced many obstacles to laying its foundation. When the act of KIC passed the National Assembly in 2005 under the Roh Moo-hyun administration, there were many controversies raised by some lawmakers who opposed to the creation of the KIC. Just two years later, the sovereign fund came to suffer the subprime crisis, resulting in a great loss from the investment in Merrill Lynch. Nevertheless, KIC generated the total profit of US$3.4 billion as of the end of 2010. Following are the excerpts from the interview with Chin Young-wook, the president of KIC.

Q: Over five years have passed since the KIC was established in 2005. Tell us about the results of investments you have made so far.

A: The Korea Investment Corporation was launched in July 2005 to enhance national wealth and to contribute to the development of the nation’s financial industry by efficiently operating its foreign reserve and public funds.

But the first President of KIC left office in one year and the next President remained in the office for only two years. I had to overcome both continuing controversies over the corporation’s existence and subprime mortgage crisis which occurred right after my assumption of office.

Now we have performed almost 10% of returns as of late December 2010, the corporation has achieved US$3.4 billion in profits out of the US$33.5 billion in investments. I believe that the figure is not bad for an institution which is only 4 years old. As of now, I think, there is no more opposition to the corporation’s existence.

KIC has made investments majorly in traditional assets, government bonds, government agencies’ bonds, corporate bonds, mortgage-backed securities (MBS) and asset-backed securities (ABS) in 68 countries as well as equity in 45 countries around the world. It has also invested in alternative assets since 2009 and opened an office in New York.

Q: What’s the direction of your business plans for 2011?

A: Above all, we’ll focus on enhancing our own capability of fund management. The size of assets we manage continues to rise. Thus, we’ll pursue strategic asset allocation to increase long-term return on investment based on strengthened research function as well as accelerate tactical asset allocation to reap additional profits.

For the tactical asset allocation, we’re going to put more resources on research into new investments and more specified areas and sectors. We’ll manage macro-data in a systematic manner as well. We’ll reflect the financial information collected through our overseas network in making investment-related decisions.

For traditional assets, we’ll endeavor to guarantee the benchmark returns or beta through portfolio investment into diverse currencies and countries listed onto our investment guidelines while strengthening our own capability of asset operation. At the same time, we’ll keep trying to generate returns in excess of the benchmark profits or alpha through risk-adjusted, active management of assets.

Investing in alternative assets, we intend to reduce risks while boosting the absolute returns through strengthened specialties by sector and field. For this, we’ll prepare and implement diverse strategies.

Besides, we will expand direct investment into the areas of strategic importance such as energy and natural resources. We will also make efforts to reinforce the global network strengthening comprehensive risk management practices and maximizing the expertise of the personnel and the organization itself.

Q: The KIC has expanded its scope of investment to include private equity (PE) and hedge fund. Please tell us about it in more detail.

A: The corporation is operating a portfolio which reflects market outlook based on asset allocation plans for mid-long-term alternative investments. It is diversifying into private equity fund, hedge fund, property and commodities to diffuse risks and guarantee a certain level of returns.

We’re pursuing strategic, overseas investments into such areas as resources and energy. In 2011, we’ll eagerly explore investment destinations considering both ROI and long-term effects such as growth potential and industrial implications.

We have a dedicated team for strategic investment and seek to improve the stability and profitability of investments by signing alliances with major institutional investors around the world. For example, we try to find joint investment opportunities using the network with overseas institutional investors such as the China Investment Corporation (CIC), Singapore’s Temasek Holdings and the World Bank’s International Finance Corporation. In June 2010, we invested US$200 million into a U.S. natural gas supplier Chesapeake Energy Corporation together with the CIC and Temasek.

Q: In that sense, risk management sounds very important. What kinds of efforts do you make on that front?

A: The corporation has a risk management system responding to the sophistication of investment strategies. We analyze and manage the risk factors related with the implementation of tactical asset allocation and the sophistication of investment strategies. At the same time, we measure and manage the risks from both traditional investments and alternative investments.

When it comes to direct investment in traditional assets, we do the compliance check twice; one through the ordering system before executing a transaction and two by the depository institutions after making the transaction. Also, we review investment-related legal and tax issues in advance and avoid legal risks using standard contract forms.

Portfolio monitoring has been greatly strengthened. We check tracking error and investment limit by country, currency, industry and credit rating on a daily basis, measure and monitor quantitative risk indicator of alternative investment assets and manage non-market risks continuously. We’re capable of controlling the scale of potential losses by measuring value at risks and conducting scenario-specific stress tests.

Q: What’s your take on recent developments of overseas sovereign wealth funds?

A: Emerging economies are eager at creating sovereign funds to diversify the investment of the increasing amount of their foreign reserve and keep China’s influence in check. Meanwhile, sovereign fund managers are increasingly looking to properties amid the growing inflationary concerns from the advanced countries’ quantitative easing and increasing liquidity. As a result, a growing amount of investments are drawn into not only property but also other tangible assets such as coal, electricity, port and energy. Japan’s attempt to create a sovereign fund is widely known through media. Taiwan is reportedly considering establishing a sovereign fund modeling after Singapore. Thailand and Indonesia are expected to follow suit as well. The fad is likely to accelerate combined with the competition over overseas resource development.

Q: Would you explain about your efforts to foster financial specialists and expand global network?

A: The KIC has endeavored to enhance its standing and the national competitiveness by expanding cooperative relations with other countries’ sovereign funds. It has sought exchanges with other sovereign funds and opportunities for joint investment.

Already, the corporation has concluded memorandums of understanding with major funds such as QIC of Australia, Khazanah of Malaysia, KIA of Kuwait and ADIA of Arab Emirates. We’re also attending international cooperative bodies to promote exchanges of information and collaboration among sovereign funds including the International Forum of Sovereign Wealth Fund (IFSWF).

We’ll open an office in London in the latter half this year. It will serve as the basis to respond to the changes in the global financial market in relation with the New York office in order to bolster the profitability.

The KIC plans to hold the Strategic Partnership for Asset-allocation, Research and Knowledge or SPARK on an annual basis. SPARK is a strategic partnership program under which leading asset management companies we choose based on investment records and capabilities of risk management, asset allocation and research come together to exchange investment information and knowledge.

Besides, we’ll hold the KIC Global Investment Seminar aimed at nurturing financial specialists and building a global network on a steady basis. Through it, we’ll back domestic asset management companies to establish overseas network by sharing the outlook for the global financial market and the trends and investment cases of more sophisticated institutional investors.

Finally, the KIC has been laboring to foster financial experts through customized programs focused on practical job capabilities in connection with the Graduate School of Finance of the Korea Advanced Institute of Science and Technology (KAIST). Since 2006, the school has invited the KIC executives or foreign asset managers to give special lectures for the program.

Q: As someone with experiences both in the public and private sectors, please share your management philosophy with us.

A: As a public corporation, the KIC should be conservative rather than being aggressive, a distinctive difference compared to private corporations which emphasize sales operation. Here, I put focus on managing the mindsets of employees. This is another difference with the private entities where I used to emphasize risk management.

If you insist on managerial philosophy, I’ve been thinking that investment is not science but art. For the KIC, what’s important is to inflate national wealth by promptly identifying the shifts in global liquidity. Basically, it is rewarding to work in such a new institution.