– Plans to allot 480 billion won ($410 million) to new alternative investments in 2016: alternative investments may top 50% of total AUM
– Interested in brownfield infrastructure assets generating stable long-term cash-flows in developed countries
– Hedge funds’ volatility-adjusted returns fall short of expectations: no further investment plan in hedge funds this year, on top of the existing portfolio worth 400 billion won
– Interested in farmland and timberland to which POBA has no exposure yet; studying possible investment
– Among foreign asset management companies, prefer independent houses with a certain asset size
By Chang Jae Yoo, Donghun Lee and Daehun Kim
Dong-hun Jang, chief investment officer of the Public Officials Benefit Association (POBA), unveiled his blueprint for how to manage over $7 billion of assets at the savings fund for local public officials. Jang, a veteran fund manager with nearly 30 years of experience in the fund management industry, took office as the CIO of POBA last November for a three-year term.
“We are reshuffling alternative investment portfolios, focusing on assets generating stable cash-flows, that is, an annual return of 5~6%,” he said in a recent interview with the Korea Economic Daily.
“We are interested in brownfield-type infrastructure assets in developed countries and raising our exposure to them. We are looking for an asset manager who can initiate investment in farmlands and timberlands together with us, although we are not in the stage of executing investment out there.”
Before joining POBA, Jang was the chief executive officer of the Korean unit of AllianceBernstein and worked as a senior executive managing director of Woori Asset Management. Previously, he headed the stock management team of SK Investment Management and served as the head of the securities research team at the Financial Supervisory Service. He received a Master’s degree in business administration from Iowa State University and a doctorate from Dongguk University in South Korea.
The following are Q&As with Jang.
▶By how much are you planning to boost alternative investment assets this year?
“As of the end of last year, alternative investments accounted for 48% of our total assets under management. That is, around 4 trillion won ($3.4 billion) of 8.4 trillion won of AUM has been committed to alternative investments. By the end of this year, our AUM is expected to rise to 9.2 trillion won, in which the share of alternative investments may exceed 50%.”
“Considering the value of assets we will exit this year, we need to make a new commitment of at least 480 billion won ($410 million) to alternative investments. This year, our focus is on changing the contents (of portfolios) to make stable cash-flows, rather than lifting or lowering the portion of alternative investments.”
▶Which asset classes are you keen on?
“In order to return profits to our members, it is important to generate stable cash-flows. We prefer investment assets yielding dividends and generating cash-flows immediately after we make investment. Our investments might have been weighted toward office buildings abroad. Going forward, we are planning to raise the portion of infrastructure assets. They provide decent, risk-adjusted expected returns, and create stable cash-flows.”
“We have a strong interest in brownfield assets which already have been making cash-flows, among infrastructure assets in developed countries. We prefer assets generating steady yields rather than betting on price change in underlying assets. Another merit of infrastructure assets lies in their longer duration. While the investment environment surrounding bond markets is becoming tougher, the liabilities we owe to our 250,000 members have a very long duration.”
“We are seeing the current low interest rate environment continuing over a longer period of time. Thus, we would like to raise our exposure to infrastructure assets which can be treated as quasi-bonds.”
▶Could you be more specific with examples?
“The Australian government has been privatizing infrastructure assets recently. Infrastructure in Australia has stable fee systems and lacks uncertainties about government policy. Thus, we see them attractive enough to invest. We recently picked an asset management company to buy assets to be privatized in Australia at a modest price. We are planning to invest in a blind fund run by the asset management firm. The asset manager has investment pipelines for various asset classes ranging from road and harbor to airport facilities.
▶We came across the name of Hastings.
“That’s right. Although not finalized yet, we have decided to commit $40 million to an open fund run by Hastings.”
▶We were told that an examination of the investment plan in private debt funds (PDFs) has been under way.
“That’s right. The share of bond-type assets is negligible, compared to our asset size. So we have been increasing their share gradually from the start of this year. As part of the efforts, we are in the process of selecting PDF managers. We will stay interested in PDFs and are planning to continue to raise our exposure to them down the road.
▶Which segments of PDFs are you looking at, in particular?
“For risk management, we would like to avoid high-leverage products. We will set a leverage limit at being equal to EBITDA and are looking for unsubordinated collateralized loans. To diversify portfolios, we will include various types of assets ranging from large-cap companies to small- and mid-caps. We will also diversify into a broader range of companies and industries, and branch out into the United States, Europe and the like.
▶How would you proceed with property investments?
“It has been weighted toward core office buildings. Now we are trying to diversify into value-added types. We initiated investment in warehouse and distribution centers a few years ago, and now we are slightly raising our exposure there. We will go ahead, regardless of whether they are located in this country or abroad.
▶How about investments in hedge funds?
“Our investments in offshore hedge funds have been made in the form of funds of funds, for a total of 40 billion won. Their performance has not been satisfactory up to now. We are now taking a wait-and-see attitude. Instead of increasing our investment size (in hedge funds), our concern is how to ensure the investments we have made can generate stable cash-flows. Offshore hedge funds in which we have made investments fell short of our expectations.
The products we like the most are those earning 5~6% on a steady basis. When it comes to hedge funds, their returns were below expectations, despite high volatility. This year, we have no plan to make an additional investment in hedge funds.
▶Any plan to make a direct investment in a single fund?
“Our basic principle is making indirect investments. I don’t think we have capacity enough to select a single hedge fund yet. We have looked for one which was expected to make decent investments for us, but their performance so far has not been satisfactory. Our current exposure to hedge funds is 40 billion won, which is not little. We continue to revamp portfolios within the hedge funds in pursuit of companies with low volatility and stable returns. We are not planning to increase the overall volume (of hedge funds in our assets), but will change their ingredients.”
▶Any plan to replace management firms?
“We are not considering replacing management firms in this point of time. But we will discuss portfolios with the management firms involved. It seems that we had high expected returns in the past. Now we are instructing them to lower expected returns and reduce volatility slightly further. We are replacing the funds within the funds.”
▶What has been your investment strategy so far and how would you like to change it?
“Some of our investments used to take event-driven strategies. Although it is a matter of strategy, we are on the lookout for companies with a high probability of achieving a steady return of 5~6%, no matter what strategy we may take. We are ordering the replacement of hedge fund houses in subsectors. Rather than sticking to a certain strategy, we provide our guidelines to funds of funds and expect them to replace fund management houses with those meeting the standards.
▶After you took office as CIO last November, do you feel any change in your organization?
“I am telling our staff: Think out of the box. We should think flexibly to make investment. I also told them that if we stuck to investments we have been familiar with and we used to do, we may lose investment opportunities beyond our horizon.”
“For example, we are interested in farmlands and timberlands, although not in the stage of executing investment in them. They are one of asset classes in which global institutional investors have made big investments, but domestic institutional investors have hardly invested in the asset class. So I asked our staff why we have not invested in them, and the answer was that we have never done it, nor did others. We need to start investment in the asset class gradually by attracting an asset management firm with a strong track record.”
▶Is it the asset class that meets POBA’s target returns?
“Yes, it is. Expected returns may vary, depending on how investment schemes are drawn up. But as I discussed earlier, I think they are decent assets for long-term investment. Although past performance does not guarantee future results, those assets have shown stable records in the past.”
“When the financial crisis struck, their prices did not fluctuate sharply. Thus, I think they are good assets to diversify our portfolios. They have some liquidity problems, but if we are armed with a safety tool, they may deserve long-term investment as a new asset class.”
“We are in the stage of studying and spreading our message through word of mouth: we are interested, so come up with your suggestions.”
▶NPS also appears interested in timberlands.
“I was recently informed that NPS has made investment in timberland. We are also willing to invest in timberland, if a management firm with a track record comes up with a robust scheme.”
“In general, our base investment unit is 30 billion won or so. Although I need to discuss with our colleagues, it is burdensome to make initial investment of as much as hundreds of billion won. I think about 30 billion won to 50 billion won may be appropriate for an initial commitment.”
“Given that we cannot have a big exposure to a single company, we will look for various companies and diversify investments. Once we gain confidence, (farmlands and timberlands) could take about 10% of our total alternative investment assets in future.”
▶Have you also allocated a large sum of money to buyout funds?
“That’s true. A buyout fund (Partners Group) was included in our recent investments in offshore PEFs. However, under the current market conditions, it is difficult to make a big commitment to buyout funds.”
“Our view is that now is not a good time to execute investments in large caps, in particular. According to the recent announcement of first-quarter results of leading PEF managers such as Blackstone, EPS has dropped significantly. The drop was due to the fact that they failed to receive performance fees because they made no exits.”
“In my opinion, although there is plenty of money in the market, the conditions are not good enough to facilitate exits. In the case of mega-deals, it would not be easy to make a swift and successful exit. This is why we preferred buyout funds specializing in mid or small caps when making new investments this time.”
▶About two years ago, large-size U.S. funds made a great number of exits. Would you think the LBO market is in a slow phase of the cycle now?
“Yes, I do. Capital depletion is a key problem, too. The pace of capital outflows triggered by capital calls is not satisfactory. Mid or small caps seem to be more appropriate for stable cash-flows and dividends. Large caps are not being traded smoothly in the market. Also, there are many other variables associated with large caps.
▶Are you going to continue to focus on mid to small caps in buyout investments?
“Yes, we are. Buyout investments may yield higher expected returns than those of funds of funds in which we have made a capital commitment, or diversified strategic funds. But relatively speaking, buyout funds do not fit into the investment strategies of our association. That does not mean we won’t invest in them. But our view is that infrastructure or diversified strategic funds will produce relatively stable cash-flows, compared to buyout funds.”
▶Are there any alternative investment assets you have to exit this year?
“Since we sold Thames Court in London last year, we are not thinking about any big-size exit. We are now in the planning stage, so it is difficult to reveal details. We will make a decision, after monitoring market conditions this year.”
“Although U.S. interest rates have not shifted to an upward trend, there is likelihood that the Federal Reserve may raise interest rates. Given that we have to consider interest rate trends and other factors before making a decision, it is hard to say now what we will exit this year.”
“We do not mean that we are shedding an investment because the investment itself has a problem. But we have to sell assets and realize profits when their attractiveness is reduced because of market change, and continue to make efforts to find new investment targets. The size of assets we need to exit would be a total of 100 billion to 200 billion won. Thus, we have to put focus on new investments rather than exit.”
▶What would be key factors under consideration to pick foreign GP?
“It does not have to be a big-name company. But it has to have a certain size of assets under management in its specialized field. In selecting an investment partner, our focus is not on whether it is an affiliate company of a big financial services firm or investment bank, but whether it has built expertise and track records for decades as an independent house.”
“When we pick PEF managers, a great number of companies, including leading firms, participated in the bidding. We thought corporate governance is very important: whether the company has a structure in which major partners and key management officials are not replaced and can concentrate on their work on a steady and stable basis. If the company meets the requirements, we are willing to study their investment suggestions and work together any time, even though they have little track records in Korea.”
“In our experience, independent management houses are doing a good job when we review presentation materials and past track records in a qualitative examination. I don’t think we have to pick a company only because it is the world’s No. 1 player in size.”
▶Default risks are growing on acquisition financing of D’LIVE and DICC (Doosan Infracore China Co.). Would you expect the risks affect your investment strategy for M&A financing, PEF or VC?
“In my opinion, the market is not in a condition to support such investments. Once there are signs of smooth exits being made and GPs involved can prove them, we are willing to make an additional investment any time.
▶Domestic stock markets are stuck in boxed range. What is your stock investment strategy?
“We look at domestic and overseas stock portfolios from the same perspectives. Overseas portfolios made up about 35% at the end of last year. Because we have to reduce volatility in assets under management as a whole, we have to lower the share of stock portfolios.”
“But there is a high likelihood that the portion of foreign stocks will increase gradually, while the portion of domestic stocks decreases gradually.”
“It seems difficult to earn more than 5% of expected returns from stocks, either at home or abroad. Taking into account the volatility and risks associated with stocks, it has been on my mind whether stocks are appropriate assets for our association to invest. It looks difficult for stock markets, either at home or abroad, to break out of boxed-range trade.”
“For foreign stock portfolios, we will keep a close track of the MSCI World Index and benchmark it to diversify investments. Our strategy will be using offshore ETFs.”
“By comparison, in the domestic stock markets, we had made indirect investments focused on general growth funds. Since I took over as CIO, the domestic stock portfolios have been divided into index funds with 40%, dividend funds with 30% and low-volatility and absolute-return funds with 30%.”
“We are revamping our portfolios to invest in indexes to avoid our assets being deviating from index movements, instead of investing in individual stocks and pursuing volatility. We are seeing the markets drifting in a boxed range. When the markets declined last January and February, we made full use of ETFs to buy stocks worth hundreds of billion won in local and foreign markets, and cashed in a substantial amount of them last March.”
“Now we are waiting. We will increase tactical asset allocations in such a way that when markets are in correction, we buy them back.”