Investing assets entrusted by the government, Bank of Korea and public funds in the global financial market
Traditional investments, which include equities, fixed income and commodity indices, comprise more than 80% of KIC’s portfolio,
playing a central role in our pursuit of investment targets.
In 2018, the stock market declined due to a rise in geopolitical risks, including the U.S.-China trade dispute, concerns over a global economic slowdown and continued monetary tightening by the U.S. Federal Reserve. In the first half of the year, emerging markets saw heavy economic adjustments from the impact of the U.S.-China trade dispute and the stronger dollar. The U.S. market, which had been on the rise until the third quarter, plummeted in the fourth, leading to a decline in global stock indices.
Interest rates for the global bond market started to rise at the onset of 2018 due to concerns over the Fed’s monetary policy tightening and continued to increase despite such intensifying geopolitical risks as the U.S.-China trade dispute. The 10-year yield on U.S. Treasury bonds reached 3.24% in November. But the year-on-year rise in U.S. interest rates was largely reversed due to a growing preference for safe assets amid rising year-end volatility and the Fed’s shift to a more relaxed stance.
KIC conducts global macroeconomic and market research, including analyses of major countries and regional economies, to support investments. Through in-depth analyses of events and political/economic issues in key financial markets, we continue to strengthen our ability to respond to changes in the investment environment.
Through close and organic collaboration among regional managers, we are developing an integrated perspective based on horizontal and vertical analysis not confined to a specific region or asset class. We are building a strategy-oriented research system to ensure that these macroeconomic analysis capabilities generate profits. We are also working to identify assets that are undervalued relative to their mid- to long-term intrinsic value.
Based on principles of long-term investing and with an intrinsic value approach, KIC invests in emerging and developed equity markets worldwide. We aim to achieve consistent and sustainable excess returns in accordance with investment guidelines.
We started managing our equity portfolio internally in 2008 with a passive investment strategy. We now use two investment strategies – quantitative and fundamental.
With the long-term vision of developing our direct investment capabilities, our Quant Team has built its own global portfolio management and trading system by benchmarking advanced systems used overseas. Based on this, and following a passive investment strategy in the initial platform, KIC adopted a quantitative alpha (excess return) model to implement an enhanced alpha-seeking strategy that seeks to maximize cost efficiency and improve risk-adjusted returns, with which we have been expanding and improving our investments.
With an independently developed internal quantitative management platform, our Quant Team uses advanced and diverse investment models to deliver stable and consistent excess returns while ensuring a low degree of volatility. We seek to diversify our strategies by introducing a new strategy that relies on both traditional statistical modeling and new techniques with wider data sources. In particular, we have developed a platform that uses a broad range of new information sources and advanced modeling techniques, including AI and big data, that have served as catalysts for technological innovation and social change.
For our fundamental strategy, we invest in global equities, aiming to generate excess returns by extensively analyzing the intrinsic value of companies and industries. We also manage region-focused portfolios through our equity investment managers in New York and London and through consistently strengthening our localized management competencies.
For our external equity portfolio management, we pursue strategy diversification to enhance performance and respond to market dynamics. We seek to strengthen our portfolio management in a balanced manner and work closely with the New York office to address new strategies. KIC also plans to adopt ESG investment strategies and reinforce our role in terms of environmental, social and shareholder rights as a long-term institutional investor.
KIC invests in bonds and currencies from various countries and sectors, including sovereign bonds, bonds issued by state-run agencies, corporate bonds and securitized bonds. We manage risk factors inherent in the global fixed-income market, including credit and liquidity risk, and strictly adhere to pre-determined investment guidelines in our pursuit of optimal portfolio management.
For the directly invested fixed-income portfolio, we use regional and sector-specific expertise derived through organic collaboration between headquarters and our overseas branches to systematically manage a broad global portfolio, diversify risk and pursue stable excess returns.
In 2018, we achieved stable returns by enhancing our credit analysis capabilities and diversifying macro strategies based on mid- to long-term macroeconomic research and policy outlooks. We also diversified our investment strategy for securitized fixed income products.
For external fixed-income management, we strengthened portfolio management and our ability to generate excess returns by upgrading our manager analysis system, including the means to analyze each risk and performance factor. We have also diversified our management strategies and conducted active rebalancing to improve performance.
KIC invests in commodity indices in energy, metals and agriculture in consideration of the possibility of prolonged inflation and for efficient asset allocation. For commodity investments, we invest in commodity-linked derivatives to diversify risk and generate excess returns through diverse strategies.
KIC’s tactical asset allocation strategy is to flexibly adjust allocation levels among asset groups and the relative investment weight within each group based on global macroeconomic flows and short-term financial market trends to generate stable excess returns.
In 2018, KIC made strides toward more stable portfolio management. We developed quantitative indicators using macroeconomic and market data. We built an internal system for portfolio management and risk analysis. And we introduced a new strategy to reduce portfolio volatility.