[ASK 2018 SUMMIT Panel Talks] Korean LPs lean toward non-dollar assets

South Korean asset owners are increasingly turning to non-dollar assets because the weakening US dollar erodes expected returns after currency hedging, while embracing multi-asset investing in search of liquid assets and knowhow about asset allocation, said their senior investment officials.

Meanwhile, insurance firms became cautious about asset-backed securities and collateralized loan obligations ahead of new accounting rules which are likely to increase risk charges for securitized notes, amid political uncertainty in Europe.

The following are remarks from senior officials of two South Korean insurance companies and two retirement savings funds in a panel discussion of ASK 2018 Global Hedge Fund & Multi Asset Summit in Seoul on May 30.

▶ Kyobo Life Insurance (Young Jik Yang, senior manager):

“Insurance companies like Kyobo Life cannot raise the proportion of dollar assets because the won/dollar swap points are declining. We are focusing on non-dollar assets.”

“We were looking at European asset-backed securities (ABS) recently. European ABS can provide a hedge against inflation which also generates a premium to us. They seemed to replace US bank loans.”

“But we are not sure if we can invest in them because of bad news from Europe. New solvency regulations to be introduced are likely to pose a challenge because they require enormous risk charges to a fund which fails to disclose details about individual companies included in the fund.”

“For equities, risk charges are likely to be 30% or more. We don’t know how aggressively we can respond to the regulations because the levels of risk charges and expected returns are not determined.”

“The purpose of our multi-asset strategy is to create stable incomes. We use multi-asset (strategy) to find other investment opportunities, too.”

“For strategic assets, we aim to outperform benchmarks and entrust them to outside managers. For tactical assets, we use exchange traded funds.”

“Of total assets, the ratio of domestic and global is 80 to 20. For global assets worth 13 trillion won, fixed incomes account for 90%.”

▶ NongHyup Life Insurance (Joowon Lee, senior manager of overseas securities investment department):

“With the dollar in a (downward) correction, we are increasing non-dollar fixed incomes which generate good, won-denominated returns. Because of currency hedging costs, we are also looking closely at non-dollar alternatives. For alternative assets, we maintain an expansionary stance with focus on new and renewables.”

“We had invested heavily in US dollar bonds. In 2015, the yield from dollar bonds was up by 1.5% after currency hedging. US interest rates also were higher than South Korean rates at the time. But that’s not the case anymore.”

“Secondly, insurance companies are preparing to respond to the adoption of IFRS17 in 2021. As for securitized debts in which insurance companies invested heavily and funds, their volatility will be immediately reflected (in accounting books), which is burdensome.”

“We issued an RFP for multi-asset strategy and executed investment last year. Our basic guidelines were long-only strategy, dynamic asset allocation and liquidity of underlying assets. We limited the underlying assets mainly to traditional assets.”

“Insurance companies cannot make active asset allocation. We generally take long-only and buy-and-hold strategies. The advantages of multi-asset funds are that they can make active management, responding to financial market movement and they have a quick investment process. Their information disclosure helps our asset allocation division to make strategic and tactical asset allocation.”

“We have a positive outlook for equities markets until the end of this year, or until the first half of next year.”

“The ratio of domestic and global assets is seven to three. Fixed incomes account for over 80%, with PDF and PEF 15%. Equities are about 2%. The proportions will not change, although there might be a slight adjustment within each asset class.”

▶ Korean Teachers’ Credit Union (Philip Yoon, head of overseas corporate finance team):

“For variable rate assets, we have been investing in CLOs for two years. We are looking for opportunities from CLOs even in the upward interest rate rise cycle.”

“In recent reorganization, we set up a management strategy division which will invest in multi-asset strategy to include relatively short-maturity alternatives.”

“We expect heavy capital inflows (to KTCU) for the next four to five years. Thus, we feel no need to adjust the proportions of assets aggressively.”

“But we expect an increase in the proportion of financial alternatives which I manage and are easy to adjust vintages of, rather than real estate and infrastructure which have inflexible maturity. Financial alternatives include hedge funds, private debts and secondaries. We are looking closely at secondaries. We can also sell existing primaries in secondary markets.”

“We have been investing via SMA since 2014. Of our investible assets of 24 trillion won, global investment assets are 11 trillion. Half of them, or six trillion won, is put into overseas real estate and infrastructure.”

▶ Korea Scientists & Engineers Mutual-aid Association (Changheon Shin, team head):

“Most of our portfolios are based on private markets and aggressively seeking illiquidity premiums. We want to change portfolios now that public real asset indices like REITs and infrastructure are dropping. But because of the long redemption period of private markets, we are looking to multi-asset for overlay strategy for quick asset allocation and risk monitoring.”

“We launched an SMA balanced fund for 450 basis points plus US LIBOR last year. In the process, we developed a new model portfolio composed of SMCI Global, Barclays Global Aggregate and S&P BB-rated credit bonds. It returns 5.5%. Based on this, we are looking for an additional absolute return strategy.”

“We would like to add income strategy through public auction for a target return at the lower end of the 4% range, which took into consideration our payout rate for subscribers.”

“We can limitedly add SMAs by giving specific guidelines about region, sector and investment instruments, depending on risk management and strategy.”

“We expect knowledge transfer from multi-asset investment. Specifically, when asset prices are expected to fall, we would like to know about how each manager squeezes alpha, their trading techniques and proportion adjustment.”

“Of five trillion won in AUM as of the first quarter, global investments account for 56.2%.”

By Daehun Kim

daepun@hankyung.com