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Weathering COVID-19 crisis, institutional investors seek more alternative exposure to curb risks

A night view of Seoul (Herald DB)
A night view of Seoul (Herald DB)
South Korea‘s institutional investors were seen averting the COVID-19 crisis to take decent returns, and pledged to increase their exposure to alternative assets to control the latent volatility risks.

The Korean Teachers’ Credit Union said Friday it reaped a windfall in 2020 by taking advantage of the stock market rebound following the depths of the COVID-19 crisis.

The KTCU, Korea‘s second-largest institutional investor, said it has returned 10 percent for 2020, or 3.3 trillion won ($2.9 billion), through its financial asset allocation. As a result, KTCU was managing 45.8 trillion won in total assets as of end-2020.

The institutional investor, dedicated to the financial welfare and benefits of teachers in Korea, reaped a financial windfall from equities at home and abroad thanks to its strategies such as market timing and sector rotation in response to changes of the global business cycle. It gained 39.7 percent in 2020 from Korean stocks, the highest since 2009, and 19 percent from foreign equities.

But equities appear to be an unlikely option to the state-sponsored credit union for this year, given its volatility-prone nature.

The KTCU said it intends to raise its exposure to alternative assets from 56.4 percent in 2020 to 59.7 percent this year, and that it will eye greater allocation to foreign assets in a bid to “generate long-term, stable income” from its capital deployment.

This resonates with an announcement earlier this week by the Military Mutual Aid Association, with 12.7 trillion won assets under management.

MMAA said it looks to “reduce its exposure to equities that are prone to volatility” and instead turn to real assets and other alternative asset classes to “seek a breakthrough amid pandemic uncertainties.” The MMAA pocketed an annual return of 6.4 percent last year.

The alternative assets allow the institutional investors to keep volatility risks at bay and to pin hopes on a foreign currency rebound, as their capital deployment often goes to foreign real assets. The dollar-to-won currency exchange rate fell 6 percent last year.

Even in 2020, when the dollar weakened against the backdrop of the pandemic impact, KTCU‘s alternative investing bore fruit. For example, KTCU’s exit from US cloud solutions provider Ellie Mae in October 2020 by partnering with US private equity firm Thoma Bravo contributed a 6.3 percent return from alternative investments here and abroad.

Earlier in February, the National Pension Service also said its dollar-denominated losses from alternative assets were offset by the assets‘ income stream such as loan interest and dividends, as well as its partnership with global players such as Allianz and Dutch pension fund APG.

The NPS, Korea’s largest institutional investor, returned 9.7 percent in 2020.

By Son Ji-hyoung (