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Dear Readers,
Global financial markets last year met with unprecedented uncertainty.
Inflation rose as the global economy started to normalize post-pandemic. The Federal Reserve and other central banks responded with aggressive interest rate hikes, sparking concerns of a global recession. Global supply chain disruptions caused by the Russia- Ukraine War, China’s “zero-Covid” policy and other factors contributed further to inflation and exacerbated geopolitical risks.
In this volatile economic environment, the prices of both stocks and bonds - representative traditional assets - saw simultaneous double-digit declines. This hadn’t occurred during the Asian Financial Crisis of 1997 nor even the Global Financial Crisis of 2008. And it undermined the fundamental investment principle of diversification.
Oaktree Capital co-founder and Wall Street guru Howard Marks wrote last year that the investment world was experiencing its first “sea change” in decades, one marking the end of a low-interest-rate era that had lasted for 40 years or, more briefly, for 13 years since the financial crisis.
KIC focused on risk management in this turbulent global economic and financial landscape. We also strengthened our macroeconomic research capabilities and reexamined our investment process to build a system that can withstand future “black swan” events.
We also weren’t swayed by immediate challenges. Instead, as the sovereign wealth fund of Korea working for future generations, we diversified our investment strategy with a long-term perspective and expanded partnerships with top global investment institutions. In short, we continued striving to become a leading sovereign wealth fund.
DESIGNING A RESILIENT PORTFOLIO
As a long-term investor, what is KIC’s strategy for dealing with volatile markets?
The benefits of diversifying into equities and fixed income, a fundamental principle of investing, are becoming less apparent. So KIC is exploring new investment strategies and expanding alternative investments, diversifying across asset classes to build a long-term investment portfolio that is less susceptible to market volatility.
As of the end of 2022, alternative investments made up 22.8% of our portfolio, up from 17.5% a year earlier. KIC started investing in alternatives in 2009, and we’ve been able to capture illiquidity premiums for long-term investments to increase returns and reduce overall portfolio risk.
We have also achieved meaningful results with direct investments. Last year, we acquired a stake in Golub Capital, one of the largest private debt managers in North America. Recognizing the sharp growth of the private debt market, where loans to blue-chip companies can generate stable cash flows, we strengthened our partnership with Golub by becoming a shareholder.
And in terms of venture investments, our San Francisco office, which we opened in 2021, is rapidly building its network and expanding investments in Silicon Valley, the heart of global tech innovation. The KIC Venture Growth (KVG) fund, which is our venture investment program, invests in companies in their early-growth stage. This helps secure high-growth- potential opportunities and expand our portfolio.
A TRULY SUSTAINABLE INVESTOR
How is KIC strengthening its sustainable investments? And what results have you achieved?
As a sovereign wealth fund, contributing to a sustainable future isn’t an option for KIC. It’s a responsibility.
We have developed a sustainable investment strategy that is suitable for each investment approach and asset class and applied portfolio-wide.
We also continue to expand partnerships to strengthen our sustainable investment capabilities. Last year, we joined the UN Principles for Responsible Investment (PRI), the world’s largest responsible investment initiative, which will help us collaborate more with leading global investment institutions and establish ourselves as a sustainable investor.
As part of an effort to tackle climate change, we have also measured the carbon emissions of our investment portfolio and analyzed climate change scenarios in accordance with recommendations from the Task Force on Climate-related Financial Disclosures (TCFD), a global standard for climate disclosures. We found that both the carbon emissions and climate risk levels of our portfolio were lower than the benchmark, and we disclosed our findings in our Sustainable Investment Report.
Over the years, KIC has gained external recognition as a sustainable investor. To give you one example, we were ranked 10th among 100 sovereign wealth funds in research platform Global SWF’s 2022 Governance, Sustainability & Resilience (GSR) Scoreboard.
BUILDING CONFIDENCE
What are some of the things KIC is doing to become a leading global sovereign wealth fund?
KIC’s core competitiveness, which remains unchanged regardless of market conditions, is our talent. Our people.
The world’s top financial institutions are all trying to secure and retain the best people. It’s a war for talent. We believe that as long as every single one of our employees brings exceptional investment expertise, outstanding investment performance will follow.
That’s why we welcomed some great mid-career hires through six recruitment rounds in 2022. We’re also giving our staff more opportunities to study abroad and actively developing overseas investment training programs in collaboration with top global managers. We have revamped our compensation system as well because we know that if KIC wants to grow alongside its excellent talent, they need excellent compensation.
Giving our employees the experience and educational opportunities to grow and rewarding them appropriately for their performance are arguably the most important ways we can invest today in becoming a leading global sovereign wealth fund.
A TRUSTED PARTNER
As a sovereign wealth fund, what role does KIC play in the development of Korea’s finance industry?
We support the development of Korea’s finance industry in several ways. For one, we strengthened our partnerships with domestic financial institutions last year by making commitments with two asset managers for overseas equity mandates. By entrusting domestic managers with more assets and continuing to diversify our strategies, we will actively help Korea’s financial institutions hone their overseas investment capabilities and become more globally competitive.
We’re also working to share our global network and management know-how with the domestic financial market. So in April of 2022, we launched the International Finance Academy, an educational program that nurtures overseas investment specialists and supports the development of Korea’s finance industry. Through this, we provide timely and practical overseas investment know-how for domestic institutional investors trying to expand their portfolios.
Our overseas offices, located in the global financial centers of New York, London, Singapore and San Francisco, are also working actively with Korean institutions. And through leveraging our network of leading global investors, we can share investment information with public and private Korean investment institutions that have expanded into these regions, helping them quickly and efficiently gain local market expertise.
In a fast-changing global financial environment that is undergoing a “sea change,” we have our work cut out for us. But we have overcome various difficult situations since our establishment in 2005, including the Global Financial Crisis and Covid-19 pandemic. And in the process, we’ve become a respected and trusted financial institution in the global financial market.
Our long-term investment horizon is not a year from now, but a decade from now, the next generation.
Our task is to continue to achieve stable, long-term returns through constant innovation.
And our goal, as a transparent sovereign wealth fund you can trust, is to build a brighter future for coming generations.
Chairman of the Board & CEO
Korea Investment Corporation
