The Korean Teachers’ Credit Union (KTCU) will aggressively seek equity-type investments such as stocks and private equities for extra returns with the risk of a global economic slowdown seen receding, and chase infrastructure and cross-border M&A financing for alternative investment, said its new chief investment officer.
The $23 billion retirement fund is targeting returns of 4.5~4.7% in 2019, up slightly from last year’s tentative 4.1%, Ho Hyun Kim, who was installed as KTCU’s CIO in January, told the Korean Investors.
“Despite concerns about a global economic slowdown, it seems unlikely to materialize. It’s time now to invest aggressively in equities to bolster returns,” he said in a recent interview.
“We are interested in opportunistic investments, participating as an anchor investor from the early stages of investment in partnership with asset managers. We prefer infrastructure to real estate.”
His remarks come after South Korean pension and retirement funds piled into direct lending, debt instruments and collateralized loan obligations, filling the void left by traditional banks since the global financial crisis.
KTCU is aiming to lift the proportion of both domestic and global stocks to 17% of total investments from the current 14.6%.
The target level at 17% is still lower than those of other major pension and retirement funds in South Korea which are seeking to scale back stock portfolios.
Both the Public Officials Benefit Association (POBA) and the Military Mutual Aid Association (MMAA) plan to reduce the proportion of equities for the next few years from 18% and 16% at end-2018 respectively, according to the Maeil Business Newspaper in January.
For the Teachers’ Pension, equities make up 35% of $14 billion assets.
Since joining the KTCU in 1991, Kim has handled stock investments and capital allocation to private equity funds.
In 2018, as then the corporate finance department head, he spearheaded the 310 billion won ($275 million) investment in the M&A deal of Toshiba Corp.’s memory chip unit. It was KTCU’s single largest investment in several years.
“Some cautioned against it, saying it was too much exposure for us. But I persuaded them on the conclusion that semiconductor demand will rise in the long term,” he said.
The following are Q&As with Kim.
▶ Any change in asset allocation strategy?
“First of all, we will step up investments in equity-type assets. Our stable asset structures built in alternative, global and debt segments give us the strength to seek extra returns.”
“When it comes to domestic stock markets, money inflows from advanced markets from the beginning of this year provided a big boost to them which suffered a big fall last year on gloomy outlooks for the semiconductor industry.”
“It’s time now to catch the opportunity and seek returns, whenever an event occurs.”
▶ How would you back up your views?
“Unlike bullish US markets, stock markets in emerging markets like South Korea’s, or those in countries highly vulnerable to external factors are severely undervalued. Such a gap will be narrowed this year. The pace of rises in emerging markets will outstrip that of the US markets.”
“Stock markets which tumbled around the end of last year are in the process of returning to normalcy. We need to seek alphas from domestic stocks markets, while there is talk of stock transaction taxes being abolished.”
▶ Do you mean putting a top priority on seeking alphas?
“I mean it’s worth doing it. Alternative assets such as global real estate and infrastructure yield about 5% per year after currency hedging costs. Under the current economic conditions, expected returns from new investment would be lowered.”
“We need to seek extra returns by making an appropriate level of equity-type investments.”
▶ Are you planning to increase the proportion of global stock portfolios with focus on emerging markets?
“We are thinking about increasing it. We expect the US economy to continue steady growth, albeit not growing as fast as in the past few years. We will also increase the proportion of emerging markets from the current level. Given the difficulty of selecting individual stocks, we will use ETFs by country.”
▶ On the proportion of alternative investments:
“There will be little change. The problem with domestic alternative markets is the shrinking pool of investible assets. Take core real estate as example. Intense competition is cutting expected returns. To prepare against such an environment, KTCU has been diversifying into NPLs and other segments since 2014.”
“In the real estate sector, we are looking closely at logistics centers and commercial mixed-use facilities to invest from their licensing stages.”
▶ Are you leaning toward opportunistic investment?
“I mean we will avoid assets, yields of which are being lowered because of excessive competition. We will explore differentiated investment opportunities.”
▶On global real estate and infrastructure investment:
“Infrastructure look better than real estate. We prefer projects like public private partnerships, for which governments guarantee the payments.”
▶ On corporate financing deals:
“We will aggressively participate in cross-border deals. Our investment in the M&A financing for Toshiba’s memory chip unit last year was such an example.”
“Domestically, as seen in the case of Lotte Group’s plan to sell financial units, business reorganization and corporate restructuring at large conglomerates will create opportunities.”
▶ On long-term goals of alternative investment:
“We will invest in assets generating steady yields, which fits our character as a life-cycle fund.” Extra returns can be achieved from equity-type investments such as stocks, venture capital and private equity funds.”
“We are planning to commit to VC and PEFs in the first half of this year and to do so, we will create a separate rookie league. We will select small-to medium-size managers with whom we can work in partnership.”
“In line with the growing demand for socially responsible investment, we will take into account ESG (environment, society and governance) factors, too.”
▶ On KTCU’s previous anchor investments in alternative assets:
“We will continue to do so. We have built trust with investment managers and asset management firms. We prefer investing in partnership, working together from the stages of creating the investment structure.”
▶ On risk management:
“We examine each investment case for two to three months, going through the examination by our investment division, the investment committee which includes outside members and the in-house executive meeting.”
▶ On 2018 investment return:
“It is tentatively 4.1%. Despite sharp declines in domestic stock markets, we made big returns from corporate financing, domestic real estate and infrastructure investments.”
▶On economic outlook:
“March seems to be an important month. The prevailing view is that China and the US will extend their trade negotiations period again. Given that no-deal Brexit will hit hard the euro zone, it is highly likely that they will try to patch things up.”
“Base interest rate hikes are unlikely to happen within the year. The Fed raised them four times last year and South Korea did once. The chance of a recession has been lowered.”
By Chang Jae Yoo and Daehun Kim
<Edited by Yeonhee Kim>