Korean sovereign fund suffers loss

By Korea Herald
  • Published : Jan 11, 2012 - 15:41
  • Updated : Jan 11, 2012 - 18:44
Losses blamed on KIC’s purchase of Merrill Lynch stake

Korea Investment Corporation, Korea’s sovereign wealth fund, suffered a net loss of 3.3 percent in terms of average yield last year, hurt by the turmoil in the global financial market and a massive loss linked to its investment in Merrill Lynch, industry sources said Wednesday.

The main culprit for the deeper loss is KIC’s poor stock investment, particularly concerning its holdings in Merrill Lynch. In early 2008, KIC bought $2 billion worth of Merrill Lynch shares, but the U.S. firm was later taken over by Bank of America in the aftermath of the subprime mortgage crisis. As a result, KIC came to own 69 million shares in BoA, but due to plunging share prices, the fund’s losses stemming from its stake in BoA are estimated to have reached $1.3 billion.

KIC manages a fund worth $42.9 billion, which includes $20 billion from the Bank of Korea’s foreign exchange reserves and $21 billion from the Finance Ministry’s foreign exchange stabilization bonds.

“Since the launch in July 2005, KIC has gone through difficult investment conditions such as the 2008 global financial crisis and the eurozone fiscal crisis in 2011,” KIC said in a statement Wednesday, defending its position. “In the past five years through the end of December last year, however, the return on its original investment of $41.5 billion is $1.4 billion.”

KIC claimed that it manages a portfolio that includes diverse assets with higher risks to secure high returns in the long term.

“When the economy slows down, the yield could dip temporarily but it is intended to earn steady long-term profits by posting bigger returns when the economy enters a recovery phase,” it said.

Last year, KIC’s investment in bonds turned a profit of 3.95 percent, but it its stock portfolio suffered a loss of 10.2 percent.

“As interest rates remained low throughout last year, many bond investors were able to get away with capital gains,” said an analyst at Kiwoom Securities, suggesting that KIC’s bond return could have been higher.

The sovereign wealth fund invests about 90 percent of its assets in foreign stocks and bonds. The proportion of stock and bond investment is about equal, while the rest of the assets are invested in real estate and hedge funds overseas. By region, more than 80 percent of KIC’s investment stays in advanced markets including the U.S., Europe and Japan.

KIC’s poor performance last year, though the fallout from the eurozone fiscal crisis cannot be underestimated, is likely to spark disputes about how the sovereign wealth fund should be managed.

“We do need a sovereign wealth fund, but it should be well-managed to increase government assets,” said Jeong Young-sik, an economist at Samsung Economic Research Institute. “It appears that it should reassess its management strategies, diversify investments and step up in risk management.”

KIC is falling behind foreign sovereign wealth funds managed by other Asian countries. The aggregate yield of KIC between 2006 and 2011 was 16 percent, which translates to an annualized average of 3 percent ― lower than consumer inflation and even the average annual interest rates offered by commercial banks.

Domestic bond-centered funds yielded a profit of 5.5 percent per year and foreign investment vehicles which invest largely in bonds offered a return of 6.2 percent per year. 

By Yang Sung-jin (