Investing assets entrusted by the government, Bank of Korea and public funds in the global financial market
KIC aims to control investment risk
within certain limits and appropriately manage potential losses.
We have established a risk management system that provides comprehensive control solutions for managing risk at every step, for not only the front, middle and back offices, but also corporate management.
The Steering Committee reviews and deliberates on risk management policy, while the Board of Directors (BOD) allocates risk limits and risk management guidelines. The Risk Management Subcommittee (under the Steering Committee) and the Risk Management Working Committee (under the BOD) arrange risk management guidelines for individual portfolio management via in-depth discussions. The Risk Management Division is strictly separated from the Investment Management Division to ensure the independence and autonomy of the risk assessment and investment monitoring processes..
KIC manages market risk, credit risk, derivatives risk, operational risk and legal risk. Quantitative indicators and limits are adopted to measure each type of risk, and each risk indicator is assessed and monitored during the investment process. When key risks exceed limits, the Risk Management Working Committee examines the issue and discusses possible solutions. To supplement quantitative analyses, we also perform various qualitative analyses.
For traditional assets including equities and fixed income, KIC manages the risk levels of its excess returns based on benchmarks designated by our sponsors. Public market risk is defined as the volatility of excess returns against the benchmark, and we measure, monitor and set limits using ex-ante tracking error (T/E). As of 2018, the exante T/E (minimum - maximum) for KIC’s total portfolio was 40-75 bps and managed within limits. The tracking error for equity was within 50-75 bps and for fixed income, 30-50 bps. As these tracking errors are the key source for alpha generation, they are effectively allocated and managed in various investment strategies.
We also use Value at Risk (VaR), stress tests and tail risk management to prepare for potential market risk elevations.
More specifically, we perform stress tests that incorporate both historical and hypothetical scenarios to estimate investment losses from multiple perspectives.
To supplement quantitative models, we designate investment-eligible products in advance and manage weights for each asset class/country/currency/sector, asset size as designated by sponsors and duration limits.
We also constantly monitor individual fund returns. If returns underperform the benchmark by a certain degree, we review the underlying reasons and prepare solutions. For traditional investments, we restrict investments in countries and products with significant liquidity constraints and regularly monitor portfolio transaction liquidity.
The Risk Management Team designates allocation limits for external managers relative to the total net value of our alternative assets and for each asset class. For diversification purposes, the team also monitors the degree of concentration by region, strategy, sector and vintage. For investment projects with potential risk, the team participates in on-site due diligence with the front office to assess investment risk factors in advance.
Post-investment, the Risk Management Team operates an early-warning system that monitors potential issues related to investment projects. Our team has also adopted and integrated Public Market Equivalent analysis, vintage concentration analysis and alternative portfolio quantitative analysis that incorporates risk factors.
KIC classifies credit risks into securities-related credit risk and counterparty credit risk. To manage credit risks from securities, we designate the lowest grade eligible for investments based on credit ratings by Moody’s, S&P and Fitch Ratings, and set investment ceilings by issuers of corporate credit.
We manage risks related to counterparties by setting for them a minimum credit rating, selecting and managing appropriate counterparties and designating exposure limits based on their credit ratings. We have also established an internal counterparty assessment system that uses such factors as counterparty credit ratings and various types of credit risk information. With this system, we monitor counterparty risks on a regular basis.
Derivatives are invested on a limited basis to enhance returns and make portfolio adjustments. To prevent excessive leverage transactions, we manage relevant risks by designating investment-eligible derivative products and assigning position limits.
Operational risk management aims to prevent KIC from incurring financial losses arising from risks associated with inappropriate internal processes, employees, systems and external factors. KIC has developed and conducts employee self-check surveys to better control operational risk. In terms of organizational structure, we have separated the front, middle and back offices to maintain an effective system of checks and balances. Operational processes for the settlement of accounts and accounting related to the management of entrusted assets, as well as our IT systems, are designed to ensure effective operational risk control. The Chief Compliance Officer oversees all matters related to operational risk management activities independently, to protect the interests of sponsors and prevent financial mishaps.
All legal items in investment-related documents are reviewed by the Legal Team to prevent legal risks from relevant regulation breaches and contract-related disputes. The Legal Team controls and manages legal risks through reviewing agreements on the management of entrusted assets, analyzing domestic and foreign laws related to investments and handling legal disputes.