Korean sovereign wealth fund accelerates push into alts

The $65 billion Korea Investment Corp. has added about $3 billion in alternatives investment this year, putting the sovereign wealth fund half-way toward its goal of lifting private equity, real estate and hedge fund allocations to 20% of its portfolio.

Dong-Ik Lee, KIC's chief investment officer, said his team has made significant progress this year toward hitting that 20% target over the next few years.

From the alternatives program's launch in the second half of 2009 through the end of 2012, those allocations remained at roughly 5% to 6% of KIC's overall assets, coming in at $3.5 billion, or 6.1%, of a portfolio valued at $56.6 billion as of Dec. 31, 2012.

Currently, on the basis of capital that has actually been drawn down, alternatives strategies account for 10% of what now is about a $65 billion portfolio, Mr. Lee said in an Oct. 4 interview.

Another 2% to 3% has been committed to alternatives strategies, but not yet drawn down, he said.

With low fixed-income yields at home and abroad leaving bond allocations vulnerable to losses if interest rates rise, a greater reliance on the mix of yield and uncorrelated returns offered by alternatives strategies is inevitable, said Mr. Lee.

At the end of 2012, hedge funds claimed the biggest share of KIC's alternatives allocations with 39% of the pie, followed by 31% for private equity, 26% for real estate and 4% in cash. While KIC's ongoing boost in alternatives allocations will remain well distributed, it will tilt more toward private equity, Mr. Lee said.

KIC's roughly $3 billion boost in alternatives allocations this year, while dramatic, is part of a broader trend in Korea, as institutional investors grapple with subpar returns on Korean government bonds.

The yields on Korean government debt, from three-year paper through 10-year bonds, remain well below 4%, and market watchers are expressing pessimism about seeing more attractive rates anytime soon.

With interest rates so low and the domestic equity market highly volatile, institutional investors are looking to alternatives to offer a solution, said Lee Heon-Chul, the Seoul-based director of UBS Hana Asset Management Co.'s institutional sales team.

The website of Korea's National Pension Service, the country's largest institutional investor, showed the 407.3 trillion won ($379.1 billion) behemoth likewise making steady progress in boosting its alternatives allocations. As of July 31, NPS' allocations to alternatives strategies, domestic and overseas, came to 9.1% of the portfolio — an increase of $2.65 billion, or 0.7 percentage points, from the start of the year.

The NPS is targeting a further acceleration of its alternatives allocations to 11.3% of its portfolio by the end of 2014, according to an announcement in June by Korea's Ministry of Health and Welfare, which oversees the national pension fund.

That push into alternatives is progressing alongside a move away from home country bias. Institutional investors hunting for “long-dated yield enhancers,” are pushing into alternatives as well as overseas equity and bond markets, noted Andrew Shin, a senior investment consultant in Towers Watson & Co.'s Seoul office. Asked how far that shift has progressed, Mr. Shin said it's not yet the third inning of a nine-inning baseball game.

Recent requests for proposals by the savings and insurance arms of Korea Post, another bulge-bracket institutional investor, reflect that growing interest in both alternatives and overseas markets.

On Oct. 1, Korea Post Savings, with roughly $60 billion under management, issued a call for global real estate managers to compete for mandates of $100 million apiece.

The move came less than two months after Korea Post Savings issued a separate RFP for managers of customized hedge fund-of-funds portfolios to compete for combined mandates of as much as $600 million.

Korea Post Insurance, meanwhile, is in the process of selecting two managers of Japanese equities to invest $30 million apiece, after calling earlier this year for up to two managers to run roughly $100 million in direct-lending strategies focused on Asia-based corporations.

That pickup in alternatives allocations by big institutional investors in Korea has found a growing number of foreign alternatives firms moving to bulk up their sales and client service muscle in the region, with veterans of those top-tier, Seoul-based institutions on the radar screens of those firms.

In late September, for example, Siguler Guff & Co., a New York-based private equity manager, hired Kyungoh “Ken” Kook, a former managing director and global head of private equity at KIC, as a Seoul-based senior adviser. Mr. Kook will be responsible for marketing the firm's investment strategies and broadening its strategic relationships in Asia, with a focus on Seoul.

In a telephone interview, Kenneth Burns, a New York-based managing director and partner with the firm, said strengthening Siguler Guff's lineup in Asia had long been on the firm's agenda, and it was just a matter of finding the right person to lead the effort.

In June, Apollo Global Management LLC, a New York-based manager of private equity, credit and real estate, added Jae Yong Park, who had served as Korea Post's senior portfolio manager for hedge funds and private equity, as the firm's sales representative in Seoul.