[Interview] Korea savings fund for small business owners mulls offshore blind fund investment in 2016

South Korea’s Yellow Umbrella Mutual Aid is flexing its muscle to expand overseas alternative assets, including blind funds, in line with a rapid asset growth and sets its sight on corporate and property loan markets in Europe, its chief investment officer said.

The $4 billion savings fund for small-sized business owners may invest 20~30 billion won ($17~25 million) in offshore blind funds, respectively, this year and select two to three asset management firms for the commitment, although the plan is not finalized yet. It is also aiming to raise the portion of alternative assets to 40% from the current 6% over the long haul, of which a substantial amount will be put into overseas investments, as its assets under management (AUM) is on course to more than double over the next five years, CIO Hwang Youn-ha told the Korea Economic Daily in a recent interview.

For overseas equities portfolios, it may drop its passive-only strategy and attempt active portfolios from the second half of this year via outside management firms. But the savings fund, which the CIO describes as having a “strong risk-avoiding tendency,” will refrain from aggressive investment before its AUM reaches 10 trillion won (about $8.4 billion), and shy away from high-risk, high-return assets and private debt funds. Instead, it will favor safe assets such as mezzanine loans and exchange-traded funds, and focus on developed markets to secure stable, albeit low, returns from overseas equities portfolios.

“Before reaching 10 trillion won in assets, we will go for project-based investments, rather than make aggressive investments,” Hwang said. “But assuming that our assets grow to over 10 trillion won in future, we need to adjust our strategy.”

The savings fund, under the Korea Federation of SMEs (K-BIZ), was launched in 2007 and has 800,000 members. Its AUM had soared by more than 40% a year in the past three years, and is expected to reach 6 trillion won in the latter part of 2017. If the savings’ fund continues to grow at a similar pace to the previous years’, it could come close to the Korean Teachers’ Credit Union and Military and the Military Mutual Aid Association, major South Korean savings funds, in size.

The CIO added that the number of its members will likely rise to 1.2 million in two years’ time, considering the number of small business owners across the country and the proportion of its members at present. “Our AUM will likely expand to 12 trillion won within the next five years,” he reckoned.

Hwang has a 35-year experience in brokerage and asset management industries. After starting his career at Korea Investment & Securities in 1980, he led fund accounting system provider Shinhan Aitas in 2003 and LS Asset Management Co. from 2007. He has been serving as CIO of Yellow Umbrella Mutual Aid since 2013. His three-year term will end this September.

The following are Q&As with Hwang..

Q: AUM at your organization has been soaring at a rapid pace. How would you lay out asset diversification strategy, in accordance with your asset growth?

A: “Currently, our investment assets come to about 4.6 trillion won, of which bonds account for as much as 68% and stocks make up 21%. To alternative assets which account for 6%, we have committed about 300 billion won. By the end of this year, we will increase the share of alternative assets to 8% and further to 40% over the long term.”

“Considering the pace of asset growth, we have to commit about 200 billion won to alternative assets this year alone, a substantial amount of which will be allocated to overseas investments. Previously, we had invested in mezzanine loans principally. But this year we are planning to invest in one or two domestic and overseas blind funds, respectively.”

“For foreign investments, we are trying to invest in senior and subordinated lending funds for infrastructure assets in developed countries. We prefer mezzanine loans which guarantee stability.”

Q: How much would you see alternative investments take of the total?

A: “We are planning to allocate about 20% of every 1 trillion won in fresh inflows to alternative investments. We are looking for various ways to build portfolios, given that our assets are expanding at a rapid speed. But the share of alternative assets is still low. It is true that we have difficulty in finding investment targets, while the number of members and AUM are snowballing at a rapid pace. We are diversifying investments into equity-linked securities, structured bonds, etc.” 

Q: Could you tell us the reasons why you want to increase the portion of overseas investments?

A: “As I said earlier, we are in the expansionary phase of assets. By the time our previous investments mature, we have to diversify assets and also lock in gains in the meantime to prepare funds to put in new investments.”

“Until reaching 10 trillion won in assets, we will go for project-based investments, rather than chasing aggressive investments. But assuming that our asset size grow to over 10 trillion won in future, we need to adjust our strategy. In real estate, for example, we used to invest in assets such as refinancing, which guarantee returns. But we should invest in the development-stage assets. In other words, we have to employ a more aggressive strategy.”

Q: What was your investment principle for overseas alternative assets?

A: “The overseas investments we have implemented so far include the federation government building of Philadelphia in the United States and a Waikiki Hotel in Hawaii, which guaranteed (stable) cash-flows. There is no change in our policy of investing in core property assets that ensure steady cash-flows over a period.”

“The reason we invest in core assets is that it can reduce the possibility of losing the principal although profits may be meager at the time of selling. Considering the nature of our organization, we are more inclined to run stable portfolios, rather than pursuing high returns at the cost of risks. As in the case of our recent investment in U.S. infrastructure asset, we would like to increase the size of per-case investment to 20~30 billion won from 10 billion won, in accordance with our (asset) growth.”

“The reason we are turning our eyes to overseas markets is that the Korean market is tiny. In Europe, tightened regulations on financial institutions made it difficult to refinance the existing property and corporate loans. It is a good opportunity for South Korean institutions. As for regions, we are primarily looking at advanced markets including the United States, Europe and Australia. We are also looking for investment opportunity in airplanes.”

Q: How would you go ahead with overseas stock investment?

A: “Overseas investments represent 5% of the total. But we are planning to increase the portion gradually. For equities portfolios, in particular, we would like to invest in ETFs and in developed markets by region. We may be selective in a certain emerging market which has a high correlation with global markets. Our basic principle is allocating assets by country and at the same time, making long-term investment in promising industries.”

“For overseas equities, we will sign an advisory contract with a top global research company and reinforce our expertise. Rather than employing a “buy and hold” strategy by region, we will also aggressively reshuffle portfolios in response to market conditions.”

“We now invest in S&P, Hang Seng China, Euro Stoxx, Nikkei indexes, etc. via equity-linked securities. For equities portfolios, we had adopted a passive strategy following index movements on the views that we are incapable of analyzing individual stocks, given the size and levels of our fund management staff. Now we are thinking about changing our internal rules to make active investments by selecting management companies in the second half (of this year). We will choose asset management companies in South Korea which are competitive in overseas equities funds.” 

Q: Portfolios focused on stable returns may lead to disappointing returns.

A: “So far we have made project-based investments in overseas infrastructure, office buildings, etc. But our investment was implemented after more than one month of a review, so we did not make prompt response to markets. Thus, we are planning to pick a category and select a qualified player to implement blind investments. Although not finalized, if we invest in overseas blind funds, we will choose two to three management companies for 20 to 30 billion won within the year. Blind funds tend to be risky, but we would like to have vintages of suitable positions in order to raise long-term returns.

Q: Local institutions have strong interest in overseas private debt funds now.

A: “Yellow Umbrella Mutual Aid has a strong risk-avoiding tendency, compared with other savings funds. Considering risk-adjusted returns, it may not be the sector for Yellow Umbrella Mutual Aid to jump in aggressively. Now that we are planning to invest in blind funds focusing on infrastructure assets in Europe, for the case in which we cannot invest on a project basis, we may invest in the form of loans.”

Q: Fund of funds are considered a good strategy for reducing risk associated with overseas investment

A: “It is one of investment strategies we are thinking about. Either at home or abroad, it looks like a good way to follow up market trends through funds and strengthen networks with players.”

“However, management companies’ capability is crucial for fund of funds. We think we lack the capability for making a direct contact with foreign management companies. That’s why we are focusing on mezzanine (loans) or project-based investments. Over the long term, we will reinforce our capability of alternative investment, including the selection of management companies. We promoted and reorganized the alternative investment division this year, and set up a division in charge of real asset investments such as corporate real estate. To invest in overseas financial assets, we have recently hired an expert and are set to launch the relevant division.”

“We will change our systems from the second half in such a way that while the existing investment review committee will be at the center, investment manager and employee in charge of risk assessment will oversee risk management together from the review stage. That will upgrade our system to the level of financial services companies and raise investment efficiency, in accordance with our growing asset size.” 

Q: There are growing views that alternative asset prices in South Korea have shot up. Is it one reason for you stepping up diversification into overseas alternative assets?

A: “Because of the persistent low interest rates, competition deepened between domestic institutions, driving real asset prices sharply higher. In view of economic uncertainties, it seems appropriate to hold off or take a wait-and-see attitude toward domestic real estate investments.”

“Although we have a plan to invest in one or two domestic blind funds during the first half (of this year), basically, we will put focus on overseas investments. Of a net increase of 200 billion won earmarked for alternative investment this year, we will put a substantial amount of them into overseas assets. Of the outstanding balance of 300 billion won in alternative assets, overseas and domestic ratios are split to 5:5. We expect the share of overseas assets will go up further this year.

By Dae-hun Kim

daepun@hankyung.com