Investing assets entrusted by the government, Bank of Korea and public funds in the global financial market
The traditional investment aims to maximize returns in excess of the policy benchmark composed of global equities, global fixed-income and commodity indices.
Global equity indices rose by more than 20% in 2017 thanks to strong performance in the United States and emerging markets. The equity index in the United States, where regional asset allocation is higher than anywhere else, maintained an upward trend throughout the year due to strong economic indicators and improved corporate profits. Equity indices in emerging markets also played their part in leading the global upward trend by rising more than 30% due to improved fundamentals, the mitigation of political uncertainties and high liquidity.
KIC’s equity investments reported outstanding performance by surpassing the benchmark thanks to efforts to expand investments in leading sectors and strategically selected investment targets. Interest rates continued declining until August due to concerns about ongoing low inflation in the global fixed-income market, and then turned around to finish the year with no significant change. Despite market uncertainties, KIC reported outstanding results against the benchmark by overweighting relatively attractive sectors, such as emerging market debt and U.S. credit debt.
KIC’s total return on traditional assets in 2017 reached 16.71%, which contributed to increasing sovereign wealth by outperforming the benchmark by 1.29% – primarily through asset allocation, relative weight adjustment among sectors and the strategic selection of targets. KIC’s aim as a sovereign wealth fund is to enhance investment returns while maintaining its long-term perspective.
As of the end of 2017, its annualized return for the past five years (2013-2017) stood at 5.74%, i.e., 67 bps in excess of the benchmark.
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 as well, we continue to strengthen our ability to respond to changes in the investment environment.
KIC is building a strategy-oriented research system to ensure that our macroeconomic analyses help generate higher returns. We are also devising thematic strategies to respond to macroeconomic changes and developing investment strategies for a variety of asset groups. Based on analyses and forecasts of the global economy and financial markets in 2017, KIC continued its strategy of allocating a higher portion of investments to equities than fixed income instruments. This strategy, along with the improved performance of companies due to the ongoing global economic turnaround, advent of the “Fourth Industrial Revolution” and continued strong performance in the equities market, contributed to higher returns in 2017.
Under principles of long-term investing and research-based value investing, KIC reviews and executes investments in a broad range of equity markets in 71 countries. Taking various risk factors into account and adhering to our investment guidelines, we manage our portfolio to continue generating high returns that exceed the relevant benchmarks.
We began making direct investments in equities in 2008 with a passive strategy, and currently manage the portfolio according to two approaches – quantitative and fundamental.
Based on an independently developed internal quantitative management platform, our quantitative strategy consists of using advanced and diverse investment models to deliver stable and excess returns while maintaining a low degree of volatility. KIC seeks to diversify its strategies by introducing new approaches while striving to develop a variety of new strategies, including a platform that applies big data and artificial intelligence, technologies that have led recent innovations and social change.
Our fundamental investment strategy aims to generate excess returns by analyzing the intrinsic value of industries and companies. We manage our region-specific portfolios by strengthening our localized management competencies through equity specialists at our New York and London offices. KIC built a global sector-based model portfolio by integrating our Research Center into our Equity Management Team in 2016, which let us manage global fundamental funds with greater stability.
For direct investments in equities in 2017, we generated excess returns in a stable manner by strengthening our research capabilities and introducing diverse quantitative strategies. We also laid the groundwork for new and innovative strategies.
For the external management of equities, we rebalanced our portfolio to improve performance and better respond to market changes. We strengthened our ability to manage the portfolio in a more balanced way by upgrading the style analysis of each fund. We also strengthened the ability of our New York investment managers to select asset managers, as well as their associated monitoring role, to boost local management capability.
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 2017, we outperformed the benchmark by enhancing our credit analysis capabilities and diversifying macro strategies based on mid- to long-term macroeconomic research and policy outlooks.
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 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 Korean economy’s reliance on overseas resources, the possibility of prolonged inflation and efficient asset allocation. For commodity investments, we invest in commodity-linked derivatives to diversify risk and generate excess returns through diverse strategies.
In 2017, crude oil and industrial metal prices rose rapidly due to supply-side controls and resilient global growth, while gold and other precious metals also rose due to a weak U.S. dollar. KIC’s commodity portfolio outperformed the benchmark with active sector allocation and diversified investment 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 2017, through an upgrade of KIC’s strategy oriented research system, our macro-economic and market environment analyses led to better investment performance. These efforts helped generate diverse investment strategies for each asset group as well. We also maintained portfolio stability through upgrading our risk management and analysis system.