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.