South Korea’s Public Officials Benefit Association (POBA) is considering investing about $17 million to $25 million in catastrophe bonds, also known as cat bonds, in what would be its first investment in the financial instrument, as it is keen to diversify away from lackluster stock markets and prime office buildings of which valuations have soared recently.
“We have begun studying rates of returns and investment methods to prepare investment in cat bonds, which will expand the range of our bond portfolios,” POBA’s Chief Investment Officer Dong-hun Jang told the Korea Economic Daily in a recent meeting. “To begin with, we will commit 20~30 billion won ($17~25 million),” he added.
If POBA goes ahead with the investment plan, the savings fund for local public officials may become the first institution in South Korea that invests in cat bonds. Catastrophe bonds are one of insurance-linked securities designed to transfer risks of accident insurance to investors.
On the sidelines of the ASK 2016 Global Private Debt & Equity and Hedge Fund Summit hosted by the Korea Economic Daily in May, Jang met officials from ILS Advisers and Leadenhall Capital Partners specializing in cat bond investments and was introduced to cat bonds. After the meetings, Jang has concluded that cat bonds, although not popular in South Korea, would fit into POBA’s investment strategy to meet target returns and diversify portfolios.
Afterwards, in a forum in Hong Kong, Jang also learned that pension funds in Europe and institutional investors in Asia, including Japan and Singapore, have already invested in cat bonds.
“We were advised by a global institutional investor that there is no reason for POBA, which pursues a 5~6% return, not to invest in cat bonds,” said the CIO.
In an effort to diversify fixed-income assets, POBA will increase the proportion of private debt funds and collateralized loans obligations which the fund has already invested in. Also, POBA has recently met with global investment firms to initiate investment in timberlands and farmlands.
“We are determined to invest in timberlands and farmlands,” said Jang. “We will choose management companies in beauty contests to make our first investment in timberland, farmland and cat bond.” The CIO, who took office last November, added that he is willing to meet asset managers specializing in specific regions or sectors anytime.
Of 8.4 trillion won ($7 billion) in assets under management at POBA, overseas assets account for 25%, shy of the ceiling of 30% set under the medium- to long-term investment plan.
“But we are thinking that the proportion should be raised further,” Jang said. “It is meaningless to split investments into overseas and domestic. The share of overseas investments may rise naturally, as we carry out investments in consideration of risk-adjusted returns.”
POBA has recently selected a consortium of South Korea’s IGIS Asset Management and CBRE Global Investors as a real estate fund general partner to commit 250 billion won to blind funds investing in property assets in Europe.
Separately, POBA will soon pick one to two asset management firms running blind funds that invest in infrastructure assets in Europe to commit about 40 billion won. Recently, POBA reportedly has set up a division in charge of infrastructure asset investment.
By Dae-hun Kim