Pensions & Investments | Korean public funds hesitant to outsource investing to SWF

Korea Investment Corp. is looking to leverage its expertise as a sovereign wealth fund invested entirely offshore on behalf of other local pension and public funds in the country, but its target audience might not be ready to jump at the offer.

At his inaugural press conference on Feb. 18, Eun Sung-Soo, KIC’s newly installed CEO, said winning mandates from local pension and public funds is part of KIC’s long-term strategy to achieve economies of scale for all involved, noted a Seoul-based KIC spokeswoman.

The day after Mr. Eun was appointed, KIC announced the 12th meeting of the Community of Public Organizations for Overseas Investment — a group KIC launched in April 2014 to support public sector investment entities, in particular, according to the fund’s most recent annual report, “domestic pension funds that lack the necessary research capabilities and talent in order to enhance investment performance of the public sector.”

For now, executives with smaller pension funds in Seoul say discussions with KIC are focused on areas where they can work together, rather than on having KIC invest on their behalf.

Talk about “outsourcing” — heard under previous KIC CEO Hank Ahn — has given way to a focus on co-investment opportunities, noted Park Min Ho, chief investment officer of the $12 billion Korea Teachers Pension Fund.

Even so, the KIC spokeswoman said over the long term, garnering mandates from other pension and public plans in Korea remains on the sovereign wealth fund’s agenda — even if it’s premature to discuss details in terms of timing or the scale of assets.

In his inaugural speech, Mr. Eun cited $200 billion in assets — more than double the $91.8 billion value of KIC’s portfolio at the end of 2015 — as a critical mass at which the world’s leading sovereign wealth funds have been able to benefit from greater bargaining power and better access to investment information.

The CEO said KIC should aim to achieve that level of assets by 2020, driven by investment performance, further infusions to the sovereign wealth fund by the finance ministry as well as mandates from other funds in Korea.

If KIC is in the planning stage, some of the largest public funds in the region are moving now to absorb assets from smaller or less sophisticated fund overseers — with varying results in terms of opportunities for external money managers.

In Japan, for example, regulators are pressuring industry pension funds — “kosei nenkin” — which suffered steep losses during the global financial crisis — to turn over management of their assets to the country’s ¥139.8 trillion ($1.25 trillion) Government Pension Investment Fund, Tokyo, over the next few years.

In China, meanwhile, pension reforms are consolidating retirement assets currently controlled by the country’s provincial governments under the National Council for Social Security Fund. That, in turn, could more than double NCSSF’s assets by the end of the year to more than $600 billion from about $300 billion currently, said Thomas Cheong, Hong Kong-based vice president of Principal Financial Group’s North Asia business.

Money managers have bemoaned the shift of kosei nenkin money to the GPIF, as those industry funds were among the leading allocators in Japan to higher alpha strategies and alternatives. (GPIF officials have said as much as 5% of their giant fund’s assets could move into alternatives strategies, but as of Dec. 31, its actual allocations amounted to only 0.04%.)

In China, however, the shift of assets from provincial governments whose investments have focused almost entirely on domestic bonds to NCSSF, a sophisticated organization with experience investing overseas, should spell more opportunities for overseas managers.

Some executives with foreign alternatives firms predicted a consolidation under KIC’s umbrella of assets slated for overseas investments could favor bulge-bracket managers such as Pacific Investment Management Co., Goldman Sachs Asset Management and J.P. Morgan Asset Management (JPM), to the detriment of smaller managers.

However, a glance at the recipients of the manager of the year awards KIC announces every July could provide some comfort on that score, with firms that hardly count as household names in Asia — including AQR Capital Management LLC, Two Sigma Investments LP and PanAgora Asset Management Inc. — in the winner’s circle.

Still, as one of the only sovereign wealth funds whose mission explicitly includes a mandate to develop the domestic finance industry, industry veterans predict KIC will face obstacles to becoming a conduit for investments by other funds in Korea.

“Employment matters in Korea, as does the growth of their base of local asset management expertise, so it makes more sense for the smaller funds to continue to develop their teams,” said Paul Adkins, managing director with Highland Capital Management Singapore Pte. Ltd.

“It doesn’t make sense … for KIC” — with its mission of investing U.S. dollar reserves for the state — “to become an aggregator and take on the complexity of managing pension money,” he said.

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