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Investing assets entrusted by the government, Bank of Korea and public funds in the global financial market

Investment Principles & Objectives

Investment Principles

Based on principles of cautious and responsible investing, we minimize overall portfolio risk by diversifying investments across asset classes and regions, and increase returns in a sustainable manner.

Investment Objectives

KIC aims to generate consistent and stable investment returns within an appropriate level of risk to preserve and increase the value of sovereign wealth..

Purpose and Use of Benchmarks
  • Benchmarks generally refer to the application of financial market indexes. They are used to identify the standards and range of suitable investments.
  • An investment benchmark is a standard against which actual investment performance can be measured. KIC assesses investment returns against relevant benchmarks with a diversified global investment approach. KIC manages its portfolio to maximize returns versus the appropriate benchmark in accordance with predetermined investment guidelines, in consideration of various types of risks.
Definition of Excess Returns
  • The excess return is a value that results from subtracting the benchmark return from the fund’s actual return. It measures how successfully the fund manager has managed assets versus the market returns (benchmark).
  • Stakeholders can stipulate excess return to the fund manager to generate returns higher than the benchmark. Stakeholders seek to improve overall returns by tying the excess returns with an incentive for added compensation for the fund manager.
  • For instance, the Ministry of Economy and Finance and the Bank of Korea entrust their funds to KIC, and KIC invests the funds as a fund manager. KIC manages the funds, aiming to generate excess returns.
  • If a fund manager were to be evaluated on absolute returns, the manager’s performance might be overestimated despite having underperformed. This could result in an improper assessment of the fund’s actual performance and the undermining of the effectiveness of investment management.
  • For example: (1) In 2008, when the capital markets collapsed due to the financial crisis, the S&P 500 index in the U.S. recorded a dismal return of -39%. As such,
    a fund manager who adopted the S&P 500 index would measure his performance against the benchmark. Even if the manager recorded -20% return, he would
    have outperformed the benchmark by 19%. (2) On the other hand, if a fund manager generated a rate of return of +20% but the benchmark recorded +25%, the
    fund manager actually underperforms the market by 5%, relative to the benchmark. This example shows that relevant benchmarks objectively evaluate the
    relative return for an investment portfolio.
  • ◎ Institutional investors use benchmarks for the following reasons:
First, the benchmark provides an objective standard by which to evaluate investment performance

A benchmark is an independent index that can be used to evaluate investment performance, in terms of the effective allocation of strategic assets. It can be used
to determine whether the performance is a result of market trends or the individual manager’s expertise.

Second, the benchmark sheds light on the strategic allocation of portfolio holdings

The benchmark reflects the investment market trends and returns of various assets. Simply identifying the components of a benchmark can be an effective way of understanding the fund manager’s strategic asset allocation, even without detailed investment guidelines.

Third, the benchmark helps ensure effective risk management

If a stakeholder does not assess a fund manager according to relevant benchmarks, the fund manager may take on excessive risk to make up for losses that might result from unexpected market volatility. When a benchmark is applied, a standard is in place to monitor asset allocation and component items within specified
risk levels. With such means, risks can be more effectively monitored and controlled.

Benchmark by Asset Class

Benchmark by Asset Class Chart
Category Benchmark
Equity Morgan Stanley Capital International All Country World Index ex Korea (unhedged)
Fixed income Bloomberg Barclays Global Aggregate Index ex KRW ex Korea (unhedged)
Commodities S&P GSCI Light Energy Total Return Commodity Index
Inflation-linked bonds Bloomberg Barclays Global Inflation-linked Bond Index
Cash ICE BofA Merrill Lynch 3-Month US Treasury Bill
Private equity Morgan Stanley Capital International All Country World Index ex Korea (unhedged) + 2%, 3 months lagged
Real estate · infrastructure G7 inflation rate + 4%, 3 months lagged
Hedge funds BofA Merrill Lynch 3-Month U.S. Treasury Bill + 3.5%, 1 month lagged
Private debt Morningstar Global Leveraged Loan Index + 1.25%, 3 months lagged

(As of January 1, 2024)