Investing assets entrusted by the government, Bank of Korea and public funds in the global financial market
KIC aims to manage the investment risks of
its portfolio within a given range and control downside risk.
The Steering Committee reviews and deliberates on risk management policy, while the Board of Directors (BoD) proposes risk management policies to the Steering Committee and oversees policy execution, including the setting of risk limits.
The Risk Management Subcommittee (under the Steering Committee) and the Risk Managerment Working Committee (Under the BOD) draw up risk management guidelines on individual portfolio management through in-depth discussions. The Risk Management Division is strictly separated foem the Investment Management Division to ensure the independence and autonomy of the risk assessment and post-investment monitoring processes.
KIC classifies risks into market risk, credit risk, derivatives risk, operational risk and legal risk. Quantitative indicators and and limits are adopted to measure each type of risk. During the actual investment process, each risk indicator is assessed and monitored. In the event that key risks exceed limits, the Risk Management Working Committee examines the issues and discusses possible solutions. We also perform various types of qualitative analysis to complement the limitaions of quantitative analysis.
KIC manages traditional assets based on the benchmarks designated by our sponsors. As such, traditional asset 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 methodology. As of 2017, the ex-ante tracking error for our portfolio was 55-80 bps for the total portfolio, 40-70 bps for equity and 30-60 bps for fixed income.
Other measures such as VaR, stress tests and tail risk management are also used to preemptively and actively meange downside risk from petential volatility spikes in the global financial market. To supplement the quantitative model, KIC also designates investment-eligible products in advance and sets limits on the allocation weightings for each asset class, country, currency and sector. We set limits on maximum outsourcing size for individual external asset managers to control concentration risk. If the return for each fund underperforms the benchmark to a certain level, we review the underlying reason and come up eith a resolution. We also have traditional invesment restrictions in certain countries and products with liquidity constraints and regularly monitor portfolio liquidity.
For alternative investments, the risk management department conducts due diligence on major investment team. KIC sets limits on maximum outsourcing size for individual alternative asset managers to manage concentration risk. We also operate an early-warning system to monitor poorly performing investments. We continue to improve our quantitative risk analysis capabilities based on public market equivalent analysis, analysis of alternative portfolio concentrations for each vintage and the use of risk factors for investments in private equity and real estate.
KIC classifies credit risks into credit risk from securities 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 issuer of corporate credit. To manage counterparty credit risk, KIC sets a minimum credit rating for counterparties, designates and manages eligible counterparties and sets exposure limits based on the counterparty’s credit rating. KIC established its own internal counterparty evaluation system, which incorporates various quantitative and qualitative factors. This lets us preemptively manage counterparty risk by using various types of credit risk information.
Derivatives are restrictively invested to enhance returns and make portfolio adjustments. To prevent excessive leverage transactions, we manage relevant risks by designating investment-eligible derivative products and setting 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 contracts and investment-related documents are reviewed by the Legal & Compliance team before investments are carried out to prevent legal disputes due to non-compliance with regulations, agreements and guidelines, as well as to prevent unfair trades.
The Legal & Compliance team is also responsible for analyzing legal risk, reviewing investment agreements related to entrusted assets and monitoring compliance by fund managers with legal and agreement terms.