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“It’s a great responsibility to be managing a sovereign wealth fund portfolio, and a credit to the Korean government to bring in someone foreign to help move the organization to the next level. The KIC, as created by the National Assembly in 2005, receives funding from foreign exchange reserves, which have been collected mostly from trade by the private sector. Our job is to redeploy those foreign currency assets and make a return within reasonable levels of risk for the country. I worry that some perceive the KIC to be politically run. We may be 100% owned by the government, but we operate 100% like a private asset management company. It’s worth noting that the KIC can’t make an investment decision until the Board of Directors and I sign off on it. No one in the government has ever backed us up against a wall and said ‘you have to make this investment.’ It’s very hands-off. Our asset base is growing rapidly as with many other SWFs. About 50% of the world’s SWFs have been established within the last decade, in line with the growth in surplus reserves in many trading and commodity-based economies. Korea’s economy is roughly $1 trillion, and it has about $300 billion in foreign exchange reserves—an awfully large pile of reserves in relation to the size of the economy. As these reserves grow, we need to figure out how to redeploy those assets, since they can’t sit wasting away in cash. The KIC is prohibited by law from investing domestically, and is only allowed to invest overseas. In addition, we have no liability stream. This makes us natural long-term investors. In terms of asset size, we finished last year with a portfolio of about $37 billion. We divide our assets into traditional, alternative, and strategic investments. Broadly speaking, the KIC was only investing in traditional asset classes in its early stages. It’s important to build a portfolio with as many uncorrelated return streams as possible. There are three critical principles that drive our investment process: 1) diversification 2) long-term investing 3) being strategic. My job has been a lot about architecture and path-finding: chopping down barriers, building platforms, and pointing out the right direction. Our biggest initiative in 2009 was the launch of the alternative investment program—introducing private equity, hedge funds, real estate, and commodities. Last year, our biggest initiative was the launch of our strategic investment program, taking direct stakes in companies. At this stage, we’re about 15% in the alternative/strategic space and 85% in public markets. Normally, when you get involved in alts, there’s a ‘J-curve effect’ as it takes a while to get performance—but, interestingly, all our alternative and strategic investments are moneymaking, even at this early stage, which is unusual. Regarding strategic investing, we take a barbell approach. We’re interested in sectors where there is a structural deficit in the Korean economy, so we can make a return while also helping to address that structural deficit. We’re also interested in industries where Korea may have a competitive edge, providing synergy for Korean companies as they continue to expand overseas. My final advice: Do your best to overcome the tyranny of the benchmark; we saw the consequences of following the benchmarks closely during the financial crisis. Benchmark investing doesn’t demand good technique. It’s not particularly strategic. Nor does it help much with risk management. We want to be anchored by our benchmarks, not be ruled by them.”
aiCIO Editorial Staff