The Public Officials Benefit Association (POBA) will continue to step up investment in US real estate loans through joint ventures (JVs) with global pension funds, while cutting the proportion of equities further on cautious outlook for stock markets, said its chief investment officer.
The $11 billion South Korean retirement fund for local government employees launched joint ventures with CaLSTRS and Teacher Retirement System of Texas (TRS) last year to invest in US mortgages.
Now it is considering setting up new JVs with other global pension funds.
“By making joint investment with a global major pension fund, we can respond nimbly to market downturns, for example, by injecting an additional capital, re-securitizing, or selling,” Dong-hun Jang, POBA’s CIO, told the Korean Investors in a recent interview.
He prefers sourcing deals through JVs and separately managed accounts, instead of taking sell-down assets from domestic investment companies because of relatively low risk-adjusted returns.
In January, Jang was re-elected as CIO for another three-year term, winning 90% votes of board members. In his first year as POBA’s chief investor in 2016, POBA’s investment returns swung to the black from the negative return in 2015.
Over the past three years, POBA’s assets under management have swollen to 12.2 trillion won ($11 billion) by the end of 2018 from $7 billion.
For alternative investments, Jang sees little change to their proportion of the total portfolios, but plans to reshuffle them within the asset class by exiting and reinvesting the proceeds.
“Now seems like an opportunity to sell them at a proper price. In light of the economic circumstances, there is little scope for additional price rises, so we will seek to sell them in a preemptive manner,” he said.
As new investment targets, POBA is looking at infrastructure and logistics centers in Europe and Japan, and multi-family housings in Japan and the US.
The following are Q&As with Jang.
▶ On tentative investment results of 2018:
“It is 4.0%. Stocks returned a negative 12%, but the loss was smaller than the market average. Alternative investments logged about 10% return.”
▶Please tell us about your portfolio reshuffling of the past three years.
“We have reduced the proportion of equities to 15% by the end of last year from 30% three years ago, and instead raised that of fixed incomes to 12% from just 1%. There was little change to the proportion of alternatives (at 58% at end-2018).”
▶Any change within alternative assets?
“We shifted focus away from individual project-based investment towards commitments to blind-pool funds for risk diversification.”
“Equity-type assets had dominated (POBA’s alternative assets), but we have sharply increased the proportion of debts over the past three years. We also made direct commitments more frequently to global investment firms with which we have built track records, instead of relying on domestic management firms for deal sourcing.”
▶ Any concerns about overvaluations in alternative assets?
“I have been hesitant about investing in sell-down assets of domestic brokerage firms, although I don’t completely rule out investing in them. Given the low risk-adjusted returns from sell-down assets, we have sourced deals through SMAs (separately managed accounts) and JVs.”
▶ On portfolio reshuffling plans:
“We will slightly cut (the proportion of) equities, while marginally increasing fixed incomes. There will be no change to the proportion of alternatives, but to the contents within them. We will look for infrastructure rather than real estate. For infrastructure assets, we will look closely at regulated assets, or the assets which can withstand market shocks.”
“For real estate, we are interested in the distribution sector, in particular, logistics centers in Japan and Europe. We are also interested in multi-family properties and now looking at such assets in the US and Japan.”
▶Please be more specific about investing in logistics centers in Europe.
“We are considering reinvesting in the funds in which we had invested four years ago. We will boost investment in logistics centers by any means.”
▶ On global real estate investment strategy:
“We will continue to step up investment in US real estate loans this year. In Japan, we are looking for an opportunity to invest in one to two-bedroom rental houses near subway stations.”
“We made real estate investments through joint ventures with CaLSTRS (California State Teachers’ Retirement System) and TRS (Teacher Retirement System of Texas) last year. We are considering establishing joint ventures with other global pension funds for (real estate) investment.”
“Rental houses are emerging as a niche market because of the housing culture change in America’s younger generation. They no longer buy a home in the suburbs, but prefer to rent a house.”
▶ What made you set up joint ventures (JVs) with foreign pension funds for investment?
“With an aim of securing stability in down markets, we have increased investment in US real estate loans (through JVs). By investing through JVs, we can secure ownership and control, unlike general commingled funds for which we are just one of many limited partners and given nothing to do.”
“By making joint investment with a global major pension fund, we can respond nimbly to market downturns, for example, by injecting an additional capital injection, re-securitizing, or selling.”
▶ How did you contact them to set up JVs?
“We were connected through US management firm PCCP. Major US pension funds also had the needs of building networks with POBA in an attempt to diversify into non-US regions.”
▶ Any exit plan?
“For not a few. Now seems like an opportunity to sell them at a proper price. In light of the economic circumstances, there is little scope for additional price rises, so we will seek to sell them in a preemptive manner.”
“The main exit targets are the assets in our country and in the US and Europe in which we have invested for four to five years. We will invest in a rotational manner by taking profit and reinvesting them.”
▶ Your outlook for stock markets?
“It seems difficult to make a big profit from stock markets this year after heavy short-covering occurred early this year.”
“Despite the Fed’s signal last month of ending the move to reduce its balance sheet, it is highly likely that they will take action again to respond to price rises. Agility became the key word now, regardless of the sector.”
“Now we need to have the ability of making a judgement and executing it, in response to the market situation, instead of seeking a direction from a broader perspective.”
▶ What do you mean by “agility”?
“POBA had build a core portfolio over the past three years. Now we need to take profit on part of them which have gone up sharply, or could take a heavy battering of shocks. For new investment, we need to put defensive assets in our basket. We will be in hurry to do so.”
▶ On investment trends for domestic real assets:
“The topic of our recent management consultation meeting was polarization and differentiation between the properties in good locations and those which are not. In good assets, we will aggressively invest at a meaningful scale. Centropolis Towers, in which we decided to invest last year with a 10-year or longer horizon, is the example.”
“As to office buildings, we will increasingly reinvest money from the exit. We expect that investment opportunity will arise in logistics centers. We also have a plan to commit to domestic real estate investment firms for value-add investment.”
▶ Any commitment plans for domestic and global PEFs and VCs?
“We have been committing 200-300 billion won every year to them and will continue the commitments. We prefer major management firms to which we can commit along with other pension and retirement funds, rather than becoming an anchor investor.”
▶ In our understanding, you have given discretionary authority to management firms:
“We have not insisted one strategy, but respected the characteristics of management firms. We prefer GPs with proven track records in fundraising and exits. We held a beauty contest (for domestic managers) last year and felt like finding a treasure which we had not recognized before despite their track records and managers’ experience.”
By Daehun Kim
<Edited by Yeonhee Kim>