Following KIC's Lead, Korea's Pension Pursues Alts

(February 17, 2011) — The Korean National Pension Service (NPS), with assets of $268.4 billion as of the end of last year, is targeting alternative assets.

According to the Wall Street Journal, South Korea’s national pension fund, the world’s fourth latest pension, is in the process of broadening its portfolio this year, aiming to invest $4 billion oversees in alternative assets that include infrastructure investments.

Jun Kwang-woo, Chairman and Executive Officer of the South Korean National Pension Service, told the newspaper that he’s spearheading an initiative for the NPS to increase its investment in overseas assets to around 20% by 2015 from around 13% at the end of last year. “We are growing faster than capacity in the local market can offer,” Jun told the WSJ. This year, the pension aims to invest a total of $10 billion oversees. Of that amount, $6 billion will be in equities and fixed-income securities and $4 billion in alternatives.

NPS’s aggressive approach toward investing more heavily in alternatives coincides with the strategy taken by the Korea Investment Corporation (KIC), South Korea’s government-owned investment management company that specializes in overseas investments. KIC’s Chief Investment Officer Scott Kalb told aiCIO that alternative assets have all been profitable.

In an attempt to diversify away from traditional assets such as bonds and equities, the Seoul-based sovereign wealth fund is aiming to make up to four strategic investments next year, increasing its allocation to both public and non- traditional assets such as private equity and real estate in the developing world. Last year, the KIC posted a 7% to 8% return from stocks and bonds traded in public markets.

“Last year, our biggest initiative was the launch of our strategic investment program, taking direct stakes in companies,” he told aiCIO last month. “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.” Kalb aims to increase the fund’s alternatives allocation to 20% from 10%, an action that supports findings from a recent survey by Deutsche Bank that points to a continued desire to focus on emerging markets and alternative strategies, such as long-short equity, macro funds and special situations, as opposed to US equity.