[Interview] Korea police fund eyes EM debt; keen on networks with foreign funds: CIO

South Korea’s Police Mutual Aid Association (PMAA), a $2 billion savings fund, is interested in sovereign debt of emerging economies, and will put efforts to build networks with foreign institutional investors and asset managers to expand overseas portfolio, its chief investment officer said.

In selecting outside managers, the association will focus on the philosophy and characters of investment firms, rather than track records, Doyoon Lee, PMAA’s CIO, told the Korea Economic Daily, adding that he will start to look at offshore infrastructure funds seriously.

“First of all, we will concentrate our efforts on building a system capable of doing overseas investments,” Lee said in a recent interview. “I will tell PMAA fund managers to build sustainable and tense relationships with foreign institutional investors, management firms and brokers, rather than having one-off meetings with them.

Lee had led Samsung Asset Management’s fixed-income division for two years since 2013. He was installed on Oct. 4 as the first CIO from outside for the police fund. At Samsung, he managed 90 trillion won ($79 billion) entrusted by Samsung Life and other institutional investors.

The following are Q&As with Lee.

Q: Your first impression of PMAA’s fixed-income portfolio?

A: Overseas investments had been made only through domestic brokerage companies. I don’t think our working-level staff have capabilities yet to search for direct investment targets abroad and require management companies to make a specific proposal.

Q: Any concern about PMAA’s lack of overseas investment experience?

A: We need to have our working-level managers build networks with counterparts in financial centers such as Singapore and Hong Kong. We don’t need customary networks.

I used to have a junior colleague who was chummy with working-level officials in partner companies in Singapore. When foreign brokers dumped Korean bonds (dollar-denominated) because of Korean risk, he was able to buy them at fire sale prices, and our company made a huge profit.

The power of buying good products at the critical moment come from such networks. Instead of sending (division) heads (abroad) for a business trip which seems like an overseas trip, I am thinking about sending working-level staff to foreign pension funds and GPs for meetings. After a face-to-face meeting, they can maintain relationships via emails or telephone calls. We can also save fees even by tens of basis points by skipping an agent.

I don’t expect working-level employees to make immediate results (from those meetings). I will tell them to meet global GPs, introduce themselves and take time to show results. Regarding overseas alternatives, I think alpha lies in “living” things, not in stereotyped, popular products.

Q: Your outlook for U.S. interest rate and overseas fixed-income markets?

A: Fed is likely to raise it in December, but I don’t think the U.S. (economic) recovery is as solid as we had thought. The pace of rate increases will be slower than in the past periods of rising interest rates.

Now isn’t time to invest in bonds. South Korean interest rates are unlikely to go down further. We cannot buy government bonds in this point of time.

Instead of U.S. bonds, we may buy sovereign debt of Mexico, Chile, or the like which have relatively good credit ratings and competitive interest rates. Southeast Asia, India and Brazil can be such examples. We need to approach them with a focus on sovereign (debt). We can also get into dollar bonds issued by state-run banks.

Q: Your picks of alternative asset classes for savings funds?

A: We need to focus on the fact that recently, all assets are being indefinitely expanded in the form of debt securities. The same goes for senior loans and PDF, and airplane funds also employ asset valuation models.

Collateralized loan obligation (CLO) are not bad in terms of risks. As for structured debt, MLP (master limited partnership) funds investing in infrastructure also look fine.

When it comes to airplanes, a number of South Korean investors have invested there recently, on the assumption that travel demand will pick up in emerging economies. We need to take a close look at stability of airlines. Rather than large-sized airplanes, medium-sized planes which are easy to redeem are in the spotlight. But it is burdensome to see many institutional investors rushing into them.

Q: How would you see commodity sectors?

A: It may not be easy to invest where underlying assets cannot be managed. For example, if we invest in U.S. timber, we cannot count the timber in South Korea. Infrastructure is better because it involves real asset, and we have authorized valuation methods.

Q: Now you switched to the position of selecting management firms, from management companies assessed by institutional investors.

A: We will not evaluate them on the basis of performance rates only. We will select management companies which have their own philosophy and push for their philosophy steadfastly and single-mindedly. We do not mean that we will ignore track records of foreign GPs and their self-introduction materials. We will pick companies with their own characters, rather than those with a trend-following system. We will also prefer GPs specializing in specific fields to GPs handling various sectors.

Q: Just before you were named as CIO, PMAA selected a number of outside management firms for offshore PDFs and domestic PEF and venture capital investments, simultaneously. Would you continue to employ such strategies? (Note: PMAA’s commitments of $20 million to each of Benefit Street Partners and Park Square Capital in September were its first investment in offshore PDFs.)

A: Since the selection of the management firms, the money has yet to be deployed. After checking their performance, we may pick additional management firms.

Q: Recently, South Korean pension funds have begun investing in South Korean infrastructure where they had not put money in the past four to five years.

A: We saw such a trend. But the domestic market is not attractive because of intense competition and low returns of under 4%. Trendy investments are drawing institutional investors which will undercut returns. We will keep an eye on offshore infrastructure funds seriously.

Q: How could you specify your role within your organization?

A: Strictly speaking, it differs from that of CIOs of other savings funds. My role as CIO of PMAA is to set asset allocation strategies. However, regarding real estate purchase and its management, a separate investment head handles it. I’m in charge of stocks, bonds and alternatives other than real estate.

(Note: In comparison, the CIO of the Korean Teachers’ Credit Union oversees all of stocks, bonds and alternative investments. The Military Mutual Aid Association has two CIOs: financial division CIO in charge of stocks, bonds and alternative investments; and construction division CIO for real estate development, real estate investment trusts (REITs) and project financing investments. PMAA’s CIO role is seen somewhere in between.)

Q: The size of assets under management and overseas portfolio of PMAA?

A: Our assets, about 2.1 trillion won ($1.9 billion), are growing at a fast pace, by 300 billion won a year. With market interest rates staying low, police officers want to put more money into our association. Raising contribution limits in the short term will add pressure on managers, but in my view, we cannot help but raise the limits for the longer term.

Our assets are split into fixed-income investments with 40%, and alternative investments with 40%. (Note: The balance consists of stocks, cash, office buildings and other real assets.) Of alternative investments, overseas portfolio accounts for half. Regarding offshore bonds, the line between offshore and domestic portfolio is blurred because we made the investments through local brokers (securities companies).

Q: You are recognized as one of top fixed-income managers in South Korea. What made you get into fixed-income management?

A: I started bond valuation at Korea Investment Trust, and participated in a training program set up to nurture fixed-income experts. In 1996, I was picked for the company’s overseas study program (MBA) and learned from Cornell University Professor Robert A. Jarrow.

It was 2010~2011 when I jumped into offshore bonds in full swing (as the fixed-income head of Korea Investment & Securities). At Korea Investment, we had launched a joint fund with Ryan Global Investment (in Singapore) to do offshore bond business. But we faced many difficulties because of no track records.

Q: The fact that you were another CIO from Korea Investment Trust (currently, Korea Investment & Securities) made the headlines.

A: It is true that those from Korea Investment Trust are serving as CIOs of major South Korean pension funds. I have experience working directly or indirectly with Korea Investment Corporation’s CIO Shin-woo Kang, Yellow Umbrella Mutual Aid’s CIO Youn-ha Hwang, Government Employees Pension Service’s CIO Young-gwon Choi, and Public Officials Benefit Association’s CIO Dong-hun Jang.



daepun@hankyung.com