The Korea Investment Corporation (KIC) posted an annual return of 9.13% for 2021 with assets under management reaching US$205 billion – exceeding the US$200 billion mark in the first time in its 16 year history.
With a return on investment totalling US$16.9 billion in 2021, cumulative returns since 2006 reached US$87.9 billion. At this pace of growth, it should easily meet its target of US$400 billion by 2035.
KIC’s continuing strong performance comes amid a shakeup in strategy and top management under chief executive Jin Seoungho, who is seeking to ramp up investment in private markets by 2027. KIC is also expanding its management of the country’s sovereign wealth, taking control of capital from local small-sized public pension funds and mutual aids under new laws that allow it to take on more assets.
Leaning Towards Private Markets, But Cautious in 2022
The fund is still heavily oriented to more conventional asset classes with public equity totalling 40.6% of AUM and fixed income contributing a further 34.9%. Yet, alternative investments now make up 17.5% of the portfolio, up from 15.3% in 2020, with private equity totalling 7.7%, real estate and infrastructure 6.5%, and hedge funds 2.7%. The annualized return for private equity was 11.33% in 2021, with real estate and infrastructure at 7.76% and hedge funds at 5.64%, while traditional assets generated an annual return of 6.75%. These results lend support to KIC’s aim of raising its alternatives asset allocation to 25% by 2025 – a target that was moved forward by two years as the sovereign wealth fund gains confidence in its private markets investment strategy.
However, chief executive Jin Seoungho said at ASK 2022, The Korea Economic Daily’s alternative investment forum held two weeks ago, that the fund will take a conservative approach to private equity in 2022 due to market volatilities. It will seek opportunities in multifamily and life science real estate.
Growth in private markets rests on the establishment the Future Strategy Group, which combines the Securities Investment Division, formerly known as Investment Strategy Division, and the Alternative Investment Division.
One means to ramp up private investments is through co-investments. In May 2021, KIC teamed up with the National Pension Service (NPS) in their first ever co-investment, piling a total of US$600 million into a US$2 billion North America logistics real estate fund managed by GLP Capital Partners. The investors are looking to capitalize on the rapid growth in logistics in the wake of the pandemic, which stimulated the e-commerce market and raised demand for big-box storage and distribution warehouses.
In November 2021, KIC teamed up with two Korean institutional investors - National Agricultural Cooperative Federation and National Federation of Fisheries Cooperatives - to deploy a combined US$300 million for co-investment with non-Korean hedge funds in a bid to increase foreign alternatives exposure.
The focus is likely to shift to startups, particularly in the US. In March 2021, KIC opened its San Francisco office, indicating it is serious about its long-term commitment to US tech startups. The move into California’s tech hub forms part of the Korean SWF’s drive to raise its allocation to alternatives to diversify risk and maintain strong returns.
KIC began startup investments in 2017, most of which were entrusted to outside asset managers. Signalling it wished to be more hands-on with direct investments, it introduced a fast-track system in which its chief investment officers can invest up to US$20 million in startups without the CEO’s prior approval. The move should allow the new office to make more rapid decisions on participating in earlier stage funding rounds, enabling KIC to become embedded in the tech investment ecosystem.
Eyes on Sustainability
KIC is also working on its ESG credentials. In March 2021, the Korean parliament amended the KIC Act to lay the legal foundation for KIC’s responsible investments, stating the fund “may consider factors such as environmental and social impact and governance structure for long-term and stable returns.”
In October, the fund sought to affirm its climate credentials by joining the One Planet Sovereign Wealth Funds (OPSWF), which was formed in 2017 in accordance with the 2015 Paris Climate Accords. Funds that endorse the OPSWF Framework pledge to integrate climate change risks and invest in the transition to a Paris-aligned low emissions economy. However, the lack of standardization of greenhouse gas auditing and reviews of progress towards targets makes judging OPSWF's real world impact difficult to measure.
The KIC is also Korea's first institutional investor to publicly advocate the Task Force on Climate-related Financial Disclosures (TCFD), which was formed in 2015. The TCFD framework involves a set of voluntary, consistent disclosure recommendations and is regarded by investors and governmental bodies as the benchmark disclosure guidance.
It established new ESG strategy funds that include ESG Core and ESG Global Strategies. In its latest sustainability report, KIC states that the ESG Core Strategy is “an active strategy that builds concentrated portfolios of companies with high sustainability, growth and profitability, through active bottom-up analysis,” aiming for a high rate of return and “a positive impact from proxy voting and engagements.” The ESG Global Strategy is an enhanced strategy “based on analysis of ESG evaluations and of ESG index construction,” aiming for a stable rate of return.
The fund has received a high score in Global SWF’s 2021 GSR Ranking with 84% overall, up 24% from the previous year as a result of its ESG efforts, and 80% in its sustainability score. In comparison, CalPERS had an 80% GSR score (down 8%), while NBIM is one of the highest ranked with 96%.