South Korea's KIC Plans Joint Investments With Sovereign Funds Next Year

Korea Investment Corp., the nation’s $37 billion sovereign wealth fund, plans to make three to four strategic investments next year with other state funds to diversify from traditional assets such as bonds and equities.

The Seoul-based fund, known as KIC, posted a 7 percent to 8 percent return this year from stocks and bonds traded in public markets, which make up the bulk of the portfolio, Chief Investment Officer Scott Kalb said. Alternative assets such as private equity, real estate and strategic investments including Chesapeake Energy Corp. have all made money, he said.

“We are in discussions with our counterparts, sovereign wealth funds all over,” Seoul-based Kalb, 54, said in an interview yesterday. “We have already looked at a number of transactions together and we’re looking at some that are pending -- our end goal there is to wind up having a diversified strategic portfolio in a variety of sectors and countries.”

Kalb has pushed to diversify KIC’s investments since he joined the fund in April 2009 for a three-year term. KIC is planning strategic investments based on a so-called barbell approach, investing in areas where there’s a “structural deficit” in Korea’s economy such as natural resources, as well as industries that may have synergies in areas such as clean technology, he said.

2008 Lessons

Sovereign funds and investors worldwide are diversifying their portfolios after the global financial crisis created high correlation across markets, Kalb said. He’s seeking to double alternative investments to about 20 percent of the portfolio from 10 percent, declining to give a specific time frame.

“One of the lessons of 2008 is that you can’t just rely on the public markets and specifically very narrow definition of that for your portfolio because you’re not going to get enough diversification,” said Kalb, a former hedge fund manager at Tudor Investment Corp. “The traditional space is going to be challenged for quite some time.”

The MSCI World Index lost a record 42 percent in 2008 amid writedowns from U.S. subprime mortgages.

KIC was set up in July 2005 to invest part of South Korea’s foreign-exchange reserves overseas. It began investing November 2006 as the government committed capital of about $20 billion in the second half that year, Kalb said.

Public market investments account for 90 percent of the portfolio and has returned 19.3 percent since inception through October, compared with the global equity benchmark’s 11.6 percent decline, Kalb said. For that traditional portfolio, the fund is $4 billion “in the black” since inception based on performance, excluding the new capital contributed, he said.

Chesapeake Investment

KIC joined Temasek Holdings Pte of Singapore and China Investment Corp. in a group that in June bought a total of $900 million of 5.75 percent convertible preferred stock in Chesapeake, the third-largest U.S. natural-gas producer. The Korean fund invested $200 million in the Oklahoma City-based company, and the value of the investment is up about 20 percent, Kalb said.

KIC also holds more than 60 million shares in Bank of America Corp., according to data compiled by Bloomberg. It invested $2 billion in Merrill Lynch & Co. in January 2008, nine months before the firm was sold to Bank of America.

Government of Singapore Investment Corp., manager of more than $100 billion of Singapore’s foreign exchange reserves, allocated 25 percent of its portfolio to alternative investments, it said in September.

‘Not Expensive’

KIC is increasing its weighting both in public and non- traditional assets such as private equity and real estate in the developing world because of its prospects, Kalb said.

“The growth story is still intact and that they are there still not expensive or in bubble territory,” Kalb said. “It’s positive that many countries in the developing world are taking steps to tighten because they are trying to be responsible for what’s going on and not just step on the gas and let things run until they blow up.”

Among the so-called BRIC markets, Brazil, India and China have all raised benchmark interest rates this year, while Russia removed a pledge to keep borrowing costs at a record low “for the coming months.”

KIC has done a few infrastructure and real estate investments in China. It bought properties in other Asian markets, African private equity, and is currently looking at investments in India, Latin America, and more in China, he said.

Kalb also sees opportunities in credit, distressed debt, refinancing and restructuring across different assets ranging from private equity, real estate and infrastructure, he said. It’s is looking at opportunities in Japanese property because of its attractive yield, he said.

For its hedge-fund investments, macro strategy, which wagers on trends in stocks, bonds and currencies worldwide, has contributed the most to the return because of the highly correlated market environment, Kalb said, adding that he continues to favor the strategy.

To contact the reporters on this story: Tomoko Yamazaki in Tokyo at tyamazaki@bloomberg.net; Komaki Ito in Tokyo at kito@bloomberg.net

To contact the editor responsible for this story: Andreea Papuc at apapuc1@bloomberg.net.

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KIC Aims More Joint Investments With Sovereign Funds

SeongJoon Cho/Bloomberg

Scott E. Kalb, chief investment officer of Korea Investment Corp., speaks during an interview in Seoul.

Scott E. Kalb, chief investment officer of Korea Investment Corp., speaks during an interview in Seoul. Photographer: SeongJoon Cho/Bloomberg