[Interview] Korean fund for small firms to allot $440 mn to alternatives in 2017

Yellow Umbrella Mutual Aid Fund, South Korea’s savings fund for small-sized business owners, will likely allocate 300 billion won ($265 million) to new alternative investments between May and December this year, as it aims to invest a total of 500 billion won ($441 million) in alternative assets for the whole of this year, about a quarter of its projected net asset growth.

The mutual aid fund, under the Korea Federation of SMEs, is the fastest-growing retirement fund in South Korea. Since its inception in 2007, a surge in the self-employed and tax deductions offered to the fund's subscribers led to the rapid growth in its assets.

“We will increase the proportion of alternative investments to 10.0% to the amount of 710 billion won by year’s end (from 5.7%),” Youngkag Park, chief investment officer of the mutual aid fund, told the Korean Investors. “We will lower the proportion of bonds from 67% of our total assets to 62% by year’s end.”

Its assets are projected to swell to 7.1 trillion won ($6.3 billion) by the end of this year, from 5 trillion won last October when he was installed as CIO and senior executive managing director of the fund.

Since the start of this year until April, the mutual aid fund deployed around 203 billion won to alternative assets, on top of 133 billion won it had committed to nine alternative investments in aggregate until the end of 2016.

“By asset class, infrastructure seems attractive… We will split our investments into 20 billion to 30 billion won per project with an upper limit of 50 billion won apiece,” Park, a former senior government official, said in a recent interview.

Park served as director of the finance ministry’s planning and budget office.

The following are Q&As with Park.

Q: On asset growth

A: Our assets increased by as much as 850 billion won in about six months to 5.8 trillion won by end-March, from 4.95 trillion won last October around the time when I took office. By the end of this year, they are expected to swell to 7.1 trillion won. With new assets and money from maturing assets combined, we need to put around 150 billion won into investments every month.

Q: On general partners’ complaint about slow decision-making by Korean savings funds

A: Our asset management staff had held individual investment cases in their hands, and presented them for approval on a case-by-case basis. That’s why we created a product screening committee which on Mondays gathers our asset management staff and team heads, gets them to brief all investment cases brought by investment firms, and screens them. We start an approval process only for the products which pass the product screening committee.

Q: Any achievement of the committee?

A: The biggest achievement is that we can shorten the review period for each investment case to three weeks or to a maximum one month.

Now that we cross-check between asset management staff, I can say with confidence that we enhanced objectivity and transparency. We may not be able to select the best product every time, but we can sift through the most investable products in a certain point of time. Because we do not fall behind schedule, investment firms come to us first with decent deals.

Q: Any change in asset allocation?

A: Our mutual aid fund had employed “buy and hold” strategy focusing on fixed-income investments. It is because we offer lower interest rates to subscribers than other savings funds. (Note: Yellow Umbrella Mutual Aid Fund offers an annualized interest rate of 2.1% to subscribers and gives an additional 0.3% point when the subscriber goes under or closes business. In comparison, savings funds for school and military personnel and public officials offer interest rates of between 3.5% and 4%.)

With interest rates falling and relatively higher-yielding bonds coming due one after another, we cannot help but make overseas and alternative investments.

We will lower the proportion of bonds from 67% of our total assets to 62% by year’s end.

Q: On proportion of overseas investments and target

A: At the end of the first quarter, overseas investments – stocks, bonds and alternative assets – were worth 461.3 billion won, making up 7.9% of our total assets. We put money into overseas stocks last year for the first time by investing in exchange-traded funds by country and by industry. Currently, overseas stocks account for 1.9%.

For overseas bonds, we have invested in Korean papers issued by top-tier domestic banks. Our overseas alternative investments were also concentrated in real estate in developed countries, as well as debt funds.

We will increase the proportion of overseas investments to 14.2% by year’s end to the amount of 1 trillion won.

Q: On alternative investments

A: Our investment assets returned 3.48% last year. Return from alternative investments was the highest at 4.7%.

We will increase the proportion of alternative investments to 10.0% by year’s end to the amount of 710 billion won (from 5.7%).

Considering the pace of asset growth, we need to invest 500 billion won in alternative investments this year alone. Up until April this year, we deployed around 203 billion won to alternative investments. Considering that we put 20 billion to 30 billion won into each alternative investment, we need to put money in two to three new investment cases every month.

Q: On alternative asset class you see as attractive

A: We began alternative investments in full swing from early last year when we set up an alternative investment team. We have invested a total of 133.0 billion won in nine investment cases, including office buildings at home and abroad, hotel, power plant and aircraft until last year. Most of them were capital call investments.

Our main investment targets in the past were physical assets in developed countries, in particular, real estate. I think we need to diversify the regions and the segments of investments with a focus on physical assets such as real estate, given the recent increase in real estate prices at home and abroad.

First, we are diversifying into Europe beyond the US and trying to find investment targets in emerging markets in southeast Asia which are experiencing robust economic growth. For buyout financing, we will increase the share of emerging markets.

By asset class, infrastructure seems attractive. We will first look at power plants, harbors and roads which are in long-term contracts with blue-chip counterparts. We will split our investments into 20 billion to 30 billion won per project with an upper limit of 50 billion won apiece.

Q: On foreign networking for overseas investment

A: I have engaged in bond issuance as a government official. We can use financial officials seconded to embassies in 80 countries to conduct reference checks of an asset management firm and examine political issues in the country where we are investing. We are also preparing to hire new employees for foreign research, who have worked in economy-related international agencies.

By Daehun Kim

daepun@hankyung.com