South Korea POBA tweaks portfolio for bull market's end

South Korea's 11.8 trillion won ($10.5 billion) Public Officials Benefit Association has been "fine-tuning" its alternatives-heavy allocations, adding active and liquid exposures this year to position itself for the eventual end of the post-crisis bull run by capital markets, its investment chief says.

Jang Dong-Hun, chief investment officer of the Seoul-based asset owner, said the portfolio his team has put together since he took the helm a little more than two years ago, anchored by a roughly 55% allocation to alternatives, should prove resilient if markets turn ugly anytime soon.

But Mr. Jang, speaking on a panel for limited partners at an Asian Venture Capital Journal conference in Seoul on Sept. 7, said the "complete change" in the market environment over the past year — marked by a sharp spike in volatility and declining scope for near-term gains — has necessitated tweaks to better position POBA's portfolio to squeeze out returns, limit downside risk and take advantage of market setbacks.

Some of those adjustments have been right out of the risk-off playbook.

Since the start of 2018, POBA has cut its equity allocation to 18% from 24.6%, with much of the difference going to the portfolio's credit-heavy offshore fixed-income holdings, up to 12% from 8.3%, and cash, at roughly double the 2% to 3% allocation the portfolio typically maintains, Mr. Jang said in an interview.

"We do not like to deploy (capital) just for the sake of deploying," said Mr. Jang, adding it's worthwhile to hold above-average levels of cash at a time of heightened uncertainty about potential "market events."

But the CIO said other adjustments his team is making now amount to a fine-tuning of allocations to better fit this year's difficult market environment.

For example, Mr. Jang, at the conference, said the challenging outlook for beta now will force asset owners to rely more on active strategies.

In a subsequent interview, Mr. Jang said that conviction is prompting POBA to tilt the portfolio's 18% equity allocation in the direction of active strategies.

For the roughly 13% allocation to domestic equity, the mutual aid association this year has reduced the passive portion to 60% of the total from between 70% and 80%, and it will look next to move its 5% allocation to overseas equities, currently 70% passive, in the same direction, Mr. Jang said.

Eventually, the passive-active mix for both domestic and international equities could settle around 50%-50%, he said. At the same time, Mr. Jang said the broader goal of diversifying the portfolio will include reducing its home-country bias. Eventually, he said, he is looking to reverse that 70% domestic-30% offshore equity mix.

While the portfolio has maintained a roughly 50% exposure to alternatives in recent years in pursuit of a targeted 5% nominal return for its portfolio, the CIO said at this point in the economic cycle his team is focusing more on liquidity in those asset classes as well.

With the continued flood of institutional money into alternatives, the "illiquidity premium has almost disappeared," Mr. Jang noted.

The POBA isn't making dramatic changes to its allocations to specific segments of the alternatives universe — currently 25% to real estate, 12% to private equity, 7% to infrastructure, 5% to hedge funds and 3% to private debt — but it has moved to shift into more liquid vehicles, the CIO said.

For example, the mix — for POBA's real estate and private equity allocations — of direct, project-specific investments and general partner-limited partner fund investments have both dropped to 60-40 from 80-20 over the past year or two, and will likely settle at 50-50, said Mr. Jang. Meanwhile, 20% of the portfolio's real estate allocation has been moved into real estate debt, offering better downside protection, he said.

In other moves this year, POBA shifted roughly $80 million of its unlisted real estate exposure into U.S. real estate investment trusts, and earlier this month issued a request for proposals for hedge fund-of-funds managers to oversee $100 million in customized portfolios — strategies that will provide the association with greater scope to liquidate in the event of a financial hiccup, Mr. Jang said.

In the current environment, the top priority becomes "not to lose money," he said.

The fund-of-funds RFP should leave the portfolio — with a roughly 5% weighting to hedge funds — where it wants to be for now; but with $500 million to $600 million in net inflows each year, POBA's allocations to hedge funds will continue to rise, he said.

Meanwhile, POBA is boosting the weight of secondaries in its private equity exposure at the expense of buyout funds, Mr. Jang said.

And even if alternatives are becoming a crowded trade, POBA will continue to hunt for niches that can deliver the nominal 5% returns it needs to cover the required dividends it pays to its members, he said.

He predicted allocations to infrastructure in particular will continue to rise.