Portfolio

Overview

 

Assets

· Total entrusted assets: US$ 60.0 billion, net asset value (NAV): US$ 72.0 billion (as of end 2013)

· NAV by asset class - Traditional assets US$ 65.1 billion, alternative assets: US$ 5.7 billion, special assets (BoA): US$ 1.2 billion

 

Return Since Inception(as of end 2013; US$ billions; %)

Category		NAV	Allocation**
Traditional Assets	Equities	34.9	48.4
	Fixed Income	24.7	34.3
	Other*	5.5	7.6
	Sub Total	65.1	90.4
Alternative Assets	Hedge Funds	1.8	2.5
	Private Equity	2.6	3.7
	Real Estate	1.1	1.5
	Cash, other	0.2	0.3
	Sub Total	5.7	8.0
Special Investment (BoA)		1.2	1.6
Total		72.0	100.0

* Other refers to inflation-linked bonds, commodities, cash, and hybrids

** NAV basis

 

 

Comparison of Asset Allocation(%)

Category	Asset Allocation (as of end 2012)	Asset Allocation (as of end 2013)
Equities	45.2	48.4
Fixed Income	38.8	34.3
Other	6.6	7.6
Alternative Assets	7.8	8.0
Special Investment (BoA)	1.6	1.6
Total	100.0	100.0

 

Investment Performance

· Annual Investment Return

· KIC has realized sound returns through continued efforts to enhance competencies under the principle of long-term diversified investing, despite two major financial crises.

 

Annual Investment Return(in US$ billions)

Category	2006y	2007y	2008y	2009y	2010y	2011y	2012y	2013y
Cumulative Investment*	1.0	14.8	25.5	25.7	34.2	44.9	51.4	66.6
NAV	1.0	15.5	21.6	29.6	36.9	42.9	56.6	72.0
Annual Gains**		0.7	-3.9	3.9	2.7	-2.0	5.2	5.4
Cumulative Gains		0.7	-3.2	0.7	3.4	1.4	6.6	12.0

* Sum of NAV at end of previous year and annual investment amount newly entrusted

**The loss in 2008 is attributable to the Global Financial Crisis, and the loss in 2011 is attributable to the eurozone crisis.

 

Return

 

Overall Return

· Return on total AUM over the past 5 years is 8.27%, return on total AUM since inception is 4.02% (annualized)

· Return on total AUM in 2013 was 9.09%, return after costs in 2013 was 8.88%

 

Return on total AUM(as of end 2013; %)

Year	2007	2008	2009	2010	2011	2012	2013
Return	7.40	-17.53	17.55	8.17	-3.98	11.71	9.09

 

Traditional Assets

· Annual return in 2013 is 8.67%, which is 108bp in excess of the benchmark 

· Annualized 5-year return is 8.62%, which is 42bp in excess of the benchmark

 

Return on Traditional Assets(as of end 2013; %, %p)

Category		2013y	3-year Annualized return (’11~’13)	5-year Annualized return (’09~’13)	Annualized return since inception
Equities	Return(A)	18.61	7.34	12.76	1.74
	Benchmark(B)	17.59	7.42	12.99	2.09
	Excess return(A-B)	1.02	-0.08	-0.23	-0.35
Fixed Income	Return(A)	-1.63	3.28	4.77	5.32
	Benchmark(B)	-1.66	3.11	4.27	5.19
	Excess return(A-B)	0.22	0.17	0.51	0.13
Total	Return(A)	8.67	5.52	8.62	4.92
	Benchmark(B)	7.59	5.28	8.21	4.83
	Excess return(A-B)	1.08	0.23	0.42	0.09

 

Alternative Assets

· Annualized return since inception is 8.42%

 

Return on Alternative Assets(as of end 2013; %)

Category	Inception date	2013y	3-year Annualized return(’11-’13))	Annualized return since inception
Hedge Funds	Jan. 29, 2010	9.02	7.59	7.65
Private Equity	Sep. 16, 2009	8.55	1.14	6.37
Real Estate	Mar. 15, 2010	9.47	8.38	7.73
Total*	Aug. 25, 2009	8.69	4.69	8.42
Special Investments (BOA)	Feb. 1, 2008	31.44	5.87	-8.71

 * Total includes commodities (included in traditional assets starting from April 2011)

 

Benchmark by Asset Class(as of end 2013)

Category		Benchmark
Traditional Assets	Equities	Morgan Stanley Capital International All Country (customized)
	Fixed Income	Barclays Capital Global Aggregate (customized)
	Inflation-linked bonds	Barclays Capital Global Inflation-linked
	Commodity Index	S&P GSCI Light Energy
Alternative Assets	Hedge Funds	G7 Inflation+4% (Benchmark for the whole of alternative assets)
	Private Equity
	Real Estate

 Traditional Investments

Objective & Performance

In managing the traditional asset portfolio, the objective is to maximize investment returns within the allowed level of risk by investing in marketable securities, mostly equities and fixed income.

 

The financial markets enjoyed considerable gains in 2013 amid expectations for recovery of the major developed economies and easing uncertainty. Despite rising interest rates, investments in traditional assets generated a return of 8.67%, outperforming the benchmark by more than 1%. Looking at the long-term performance, the return on the traditional asset portfolio temporarily slipped into negative territory in the wake of the global financial crisis in 2008 and then again in 2011 at the time of the U.S. credit rating downgrade and the fiscal crisis in Europe.
Performance improved as markets recovered from their declines. Over the past five years, traditional assets have delivered an annual return of 8.62%, which is 0.42% in excess of the benchmark.

 

Equities

Under the principle of global diversification, the portfolio comprises equities from 69 countries. KIC manages its equity portfolio by strictly adhering to pre-set investment guidelines that take into consideration various risk factors with a view to maximizing returns relative to the benchmarks.

KIC initiated internal fund management (IFM) employing a passive strategy in 2008 and subsequently adopted an enhanced strategy based on quantitative models.

Based on research on individual equities and sectors as well as regional characteristics, KIC is diversifying its portfolio, taking into consideration risks and expected returns.

 

Thanks to abundant liquidity injected by central banks of the U.S., Europe and Japan coupled with expectations for economic recovery, most of the global equity markets rallied in 2013. However, concerns of QE tapering by the U.S. Federal Reserve and the ensuing depreciation of emerging market currencies sparked numerous corrections. Through stable management of a diversified portfolio, KIC delivered a return of more than 18% on equity investments, markedly higher than the benchmark.

 

Fixed Income

In order to generate consistent excess returns through diversification and specialization, KIC fixed income investments manage various assets including government, agency, securitized and corporate bonds across 22 currencies and 58 countries.

The focus for our internal fund management (IFM) has been to include a broad universe of asset classes, leverage our overseas presence and pursue diversification through various strategies with low correlation, in order to better protect the portfolios in a rising interest rate environment. Turning to external fund management (EFM), we aim to generate stable excess returns by constructing a balanced portfolio of global fixed income managers with proven track. Absolute return of the combined fixed income portfolios fell short of expectations in 2013 which was characterized by a rising interest rate environment; however, the performance outperformed the benchmarks.

 

Commodities

To deal with Korea’s dependence on imported natural resources and long-term inflation caused by quantitative easing around the world, KIC invests in commodity indexes comprised of energy, metals and agricultural products. Commodities investments are made in related commodity indexes and derivative products. The S&P GSCI Light Energy serves as the benchmark. The objective is to diversify risk and achieve alpha via allocation across sectors and other strategies.

 

Commodities indexes declined in the first half of 2013 due to China’s lower-than expected GDP growth and the resulting weakness in demand from emerging countries. In response to the market environment, KIC has decreased exposure to non-ferrous metals, which is heavily swayed by China’s demand, and increased weightings in energy.

 

Tactical Asset Allocation

Tactical KIC conducts analysis on a wide range of variables, from global macroeconomic flows to short-term trends in the financial markets, to flexibly adjust weightings according to asset class and generate stable excess returns. We are developing a proprietary model for analyzing and predicting global economic and financial market conditions.

KIC also continues to enhance internal knowhow through the exchange of research and investment opinions with prominent asset managers through the SPARK (“Strategic Partnership for Asset-Allocation, Research and Knowledge”) Roundtable.

Alternative Investments

Objective & Performance

Alternative assets have a different risk / return profile compared with traditional asset classes. They enable the creation of a portfolio with lower risk for a given return. This paves the way for more efficient investment than a portfolio solely comprising traditional assets.

KIC began investing in private equity and real estate / infrastructure in 2009, and widened the scope of investment to hedge funds in early 2010. During the following two years, we expanded our pool of alternative asset professionals and established related processes and systems while achieving sound returns. In 2013, we expanded and diversified our alternative asset portfolio as we continued to pursue stable and sustainable return on investments.

Private Equity

Private equity is classified as an illiquid / growth driver for returns in our alternative asset portfolio and provides opportunities to capture higher risk premiums associated with illiquid investments. KIC makes direct and indirect investments in a wide range of industries. We strive to enhance risk-adjusted returns through co-investment with other sovereign wealth funds and prominent global pension funds.

Our emphasis was on diversifying investments across new strategies, sectors and regions. Moreover, we set up a monitoring system to maintain portfolio stability and reinforce risk management.

Real Estate & Infrastructure

Real estate and infrastructure, demonstrating characteristics of both equities and fixed income, provide a great hedge against inflation. As they entail large-scale investment and low liquidity, these assets are appropriate for a long-term investment horizon.
 

In 2013, KIC formulated portfolio strategies for developed and emerging markets suited to the respective regions, in pursuit of relatively stable and high target returns. KIC adopts customized investment strategies for the mid-to-long-term, taking into account regional characteristics. The scope of investment is being broadened to diverse sectors with the goal of generating stable returns.

Hedge Funds

Hedge Funds have a relatively low correlation with the economic cycle and financial markets and they maximize efficiency of capital while delivering absolute returns. There are a wide variety of hedge funds with different investment strategies and techniques. Rather than concentrating on a limited number of strategies, our objective is to diversify investment across multiple strategies, in consideration of the
composition of hedge fund indexes.

 

In 2013, KIC adopted a new strategy that differs from past hedge fund investments for the purpose of portfolio diversity and stability. We pursued high returns with active portfolio rebalancing suited to the market environment. KIC’s hedge fund portfolio is designed to produce consistent returns with lower-than-average market volatility, and can be classified as a stable asset.