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Interview

Construction workers' fund targets stable-income alternatives

By Nov 10, 2020 (Gmt+09:00)

South Korea’s Construction Workers Mutual Aid Association is chasing government-sponsored infrastructure and public private partnership (PPP) projects for alternative investment as well as data centers and logistics facilities, reflecting its investment priority on securing stable income.

Wihwan Lee, chief investment officer of the $4 billion savings fund, stressed the importance of conducting on-site due diligence of global investments, but said he has little interest in overseas property assets that domestic brokerage firms have not yet sold down.

Construction Workers Mutual Aid Association's CIO Wihwan Lee
Construction Workers Mutual Aid Association's CIO Wihwan Lee

“Because of the coronavirus (impact), brokerage companies may need to continue to hold those unsold assets," he told The Korea Economic Daily in a recent interview. "The ongoing overvaluation issue will likely weigh on the real estate market."

Lee, a former head of investment at Hanwha General Insurance Co., said his fund has no preference for any particular asset manager, or general partner (GP), given that every investment needs a review by its decision-making committee.

He made clear that his institution has no intention to replace on-site research with online due dilligence.

“I need to go to them, see with my own eyes and touch with my bare hands. Without on-site checking, I won't invest in them.”

Touted as the most conservative asset owner among pension funds and mutual aid associations in South Korea, the association put 1 trillion won, or 24% of its 4.1 trillion won ($3.7 billion) assets under management, into alternatives as of the end of August. Fixed income accounts for 60% of its portfolio.

Lee took office as CIO in February of this year.

He worked at Samsung Life Insurance Co. between 2001 and 2015, during which he headed the insurer’s equities investment team, and worked in the London office between 2005 and 2010. He also led Samsung Asset Management Co.'s global fixed income investment between 2015 and 2016.

The following is a transcript of the interview:

▲ How is Construction Workers Mutual Aid different from other Korean mutual aid associations?

“Construction Workers Mutual Aid puts its top priority on stability and public interest, rather than profitability. Among Korean mutual aid associations, we are the only public institution, controlled by the Ministry of Employment and Labor. But the government does not cover our shortfalls, thus we have to produce returns under any circumstances for our 5.4 million members every year. That is why our top investment priority is stable income. We are trying to maintain a management style fitting of a public institution.”

On alternative investment strategy:

“We began alternative investment four years ago. Unlike insurance companies, we do not like long-duration investments. We prefer five- to seven-year investments. We have exited quite a number of investments within five years.”

On COVID-19 impact on alternative investment market:

“Local institutional investors’ herd behavior towards overseas real estate markets deepened over the past two to three years, driving asset prices higher than their real values. Many institutional investors are quite concerned about overvaluation.”

“In addition to overvaluation concerns, there are quite a few assets bought expensively by brokerage companies but yet to be sold down to institutional investors. There are many such cases with overseas real estate deals.”

“Because of the coronavirus, brokerage companies may need to continue to hold those unsold assets. The ongoing overvaluation issue will likely weigh on the real estate market.”

▲ On favorite asset types within the real estate and infrastructure sectors:

“Institutional investors are highly interested in overseas infrastructure assets generating a steady stream of income. We invest in them even for higher prices and relatively small gains. The purpose of alternative investment is making appropriate returns from safe investments.”

“When investing in infrastructure assets, we prefer those sponsored by a government, or in which a government has a stake. For us, there is little distinction between greenfield and brownfield projects. Our focus is on stability, rather than profitability. Our most favorite investments are PPP projects. But there are not many opportunities for such assets.”

“Next in line are logistics centers and data centers, many of which are under long-term lease agreements and generate a steady stream of income over the longer term. Tenants of data centers are less inclined to move out unless they go bankrupt. A lot of investment money is funneled into such asset classes. Even when we were forced to do due diligence online because of the coronavirus and travel restrictions, institutional investors invested a lot in such facilities. We have invested in domestic data centers and logistics centers, as well.”

“Safe and cheap assets in markets have disappeared very quickly. It is right to buy safe assets despite paying slightly high prices.”

“In the domestic market, we recently invested about 20 billion won in a logistics center in Suwon (in southwest of Seoul) and a warehouse in a customs-bonded area within the Incheon International Airport. Institutional investors like these types of assets. Because of heated competition, their expected returns have dropped sharply.”

On investment method for the above-mentioned assets:

“We invested in both debt and equity tranches of those assets to secure stable income. We usually invest abroad via funds of funds. In the domestic market, there is only a small collection of assets available for investment. Competition has intensified this year because of restrictions on overseas investment given the pandemic.”

“Once cross-border travel restrictions are lifted and we can do due diligence on-site, we will invest in such types of assets abroad.” 

On overseas property investment plan:

“We will expand investments in logistics centers. We have some exposure to office buildings and retail properties. The tenants in the retail properties we invested in are demanding a delay of rent payments, that is one of a few factors that feels like a sell signal.”

“We invested in them as senior lenders, so there is no risk of losing our interest income. Anyhow, our exposure to them is not significant.”

On investment philosophy as CIO:

“Maybe it's because of my long work experience at insurance companies: I rule out risky assets, however high the returns are. Some investors tend to make an investment without thorough on-site research or without knowing much about the investment target, while seeking high returns.”

“Only after we are armed with solid knowledge about an investment target and after on-site due diligence, then we are convinced of the investment and can achieve our long-term target returns. I need to go to them, see with my own eyes and touch with my bare hands. Without on-site checking, I won't invest in them.”

On overseas private debt and private equity investment:

“We have no overseas private equity exposure. Our overseas private debt portfolio is currently worth 87.6 billion won. We plan to expand investment in both overseas PE and PD.”

On domestic PE investment:

“Our venture capital and private equity investments are only 200 billion won combined."

"We don’t have any favorite GP either for PE or PD investment. As a public institution, we have to go through our investment committee to select GPs, making quantitative and qualitative evaluations.”

▲ On fixed income portion:

“Fixed income represents over 60%. We will reduce the fixed income portion over the long term. Also, we will cut the equities portion which comes in at 10%, worth 400 billion won, in the long term. Instead, we will gradually increase the alternatives portion."

“Although we will cut our overall equities portion, we are considering expanding our exposure to overseas equities as part of portfolio diversification. We will enter the market only when we expect to make decent returns.”

How does your mutual aid association collect money from construction workers?

“After receiving their pay, construction workers deposit 6,500 won a day to us. We take 300 won for expenses, and manage the remaining 6,200 won."

“Once they exceed 252 working days, they are allowed to get back the savings and their interest as severance pay. We return their savings with interest.”

On your investment style:

“Investing in risky assets is against our institution’s establishment purpose. Once we secure stability, we then pursue profitability. But we cannot deposit all our money into bank accounts. If so, we cannot make money to return to our subscribers. Given the high volatility in stock markets, we don't increase our equities portion.”

“The reason we are increasing alternative investments is that they are safer than stocks, but yield higher than bonds. In terms of asset allocation, they are like a mezzanine investment. Based on the fixed income portfolio, we make more money from alternatives than stock investments to return to our subscribers.”

Write to Seon-Pyo Hong and Sang-eun Lucia Lee at rickey@hankyung.com

Yeonhee Kim edited this article.

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