South Korean Sovereign Wealth Fund to Boost Equities Investment

21st July 2009, Bloomberg.com

Korea Investment Corp., the country’s $30 billion sovereign wealth fund, said it will increase the equities allocation in its portfolio later this year and target additional investments in the U.S. and Asia.

“We think it’s unlikely that bonds are going to continue to outperform stocks from here over the long term,” Chief Investment Officer Scott Kalb said today in an interview in Seoul. “We’re moving more towards equity.”

The Seoul-based fund, known as KIC, plans to increase its equities holdings to 50 percent of “traditional” investments by the end of this year from the current 40 percent, Kalb said. The portfolio of “high-quality equities and fixed income” securities makes up 90 percent of KIC’s total assets, he said.

The fund is seeking equity investments in the U.S. after asset values plummeted since last year’s credit rout, Kalb said. It is also interested in Asian countries, which have fared better than the developed nations in the turmoil, he said.

Asian indexes make up six of the 10 best performing stock measures worldwide this year, led by China, Sri Lanka and India, data compiled by Bloomberg show.

U.S. government bonds handed investors a 4.5 percent loss between January and June this year, according to Merrill Lynch & Co.’s U.S. Treasury Master Index. That’s the worst first-half performance in at least three decades. The Standard & Poor’s 500 Index, which rose to its highest level since November yesterday, added 1.8 percent in the six-month period.

State Pension Fund

Other South Korean state-run funds are also adding overseas stocks. National Pension Service, the nation’s biggest investor, plans to double its international assets within the next six years by investing in the so-called BRIC nations -- Brazil, Russia, India and China -- and other Asian countries.

Foreign investments may jump to 15 percent of the world’s fifth-largest pension fund’s $204.7 billion in assets under management by 2015, up from 7.4 percent, the pension fund said.

“We need to boost returns in order to secure the long-term financial stability of the fund,” Jeon Jae Hee, who oversees the state pension fund and is the minister of Health, Welfare and Family Affairs, said in New York on July 17.

KIC, set up in July 2005 to invest part of South Korea’s foreign-exchange reserves overseas, will start investing $1 billion this year in “alternative investments,” including real estate, commodities and private-equity and hedge funds, Chief Executive Officer Chin Young Wook said on July 15. Initial investments will focus on assets that would hedge against inflation, he said.

Inflation

“Inflation is not going to be a concern for another year or two, but we need to have some protection,” Kalb said today. “You don’t want to buy insurance after your house is on fire.”

The fund targets returns of around 4 percent to 5 percent on its investments after adjusting for inflation, said Kalb, who joined KIC in April. He previously worked at Balyasny Asset Management LP and Black Arrow Capital Management.

KIC holds about 62 million shares in Bank of America Corp. after its holding in Merrill Lynch & Co. was converted. The fund invested $2 billion in Merrill Lynch in January 2008, nine months before the firm was sold to Bank of America.

To contact the reporter on this story: Bomi Lim in Seoul at blim30@bloomberg.net; Seyoon Kim in Seoul at skim7@bloomberg.net