[Exclusive] KIC to Eliminate Asset Class Barriers... Total Portfolio Approach to Be Piloted for 10% of Assets

TPA Pilot to Cover 10% of Assets from July 1,
Full Implementation Planned for Next Year

Potential Challenges in Asset Allocation and Performance Evaluation

The sovereign wealth fund Korea Investment Corporation (KIC) will pilot its Total Portfolio Approach (TPA) strategy, which removes the barriers between asset classes, on 10% of its total assets. The plan is to maximize returns by applying this flexible approach without separating target returns, risk levels, or asset allocation by asset class. However, challenges remain, such as potential competition between different asset management teams for investable assets and possible disputes regarding performance measurement.

According to the investment banking (IB) industry on May 29, KIC will begin its TPA pilot on July 1. The assets subject to this pilot account for 10% of its total assets under management. As of the end of last year, KIC managed USD 232 billion (approximately KRW 34.9 trillion), meaning around KRW 35 trillion will be managed using the TPA model. This scale is comparable to the total assets under management by major domestic institutional investors (LPs) such as the Government Employees Pension Service and the Teachers' Pension.

TPA is an advanced investment strategy that has evolved from the traditional Strategic Asset Allocation (SAA). In SAA, investment limits are set and managed separately for each asset class, such as equities, bonds, and real estate. In contrast, TPA removes these barriers. The sole criterion for investment is whether the overall portfolio meets the target return and acceptable risk levels.

For example, allocating a portfolio as 30% equities, 30% bonds, 20% real estate, and 20% alternatives and managing allocations within these boundaries represents SAA. In this system, even if the alternatives team identifies an attractive infrastructure deal or private equity (PEF) opportunity, it is difficult to invest further if the allocation limit has been reached. Conversely, there is pressure to allocate funds to maintain the target ratio, even if market conditions are unfavorable.

On the other hand, TPA does not divide by asset class, allowing for more flexible capital allocation. Instead of prioritizing whether an asset is real estate or a bond, the focus is on the role it plays in the overall portfolio in terms of return, risk, and liquidity.

Experts note that this approach is particularly suitable in today's market, where asset characteristics have become increasingly complex. For example, data centers may appear to be real estate investments, but they also have characteristics of power and telecommunications infrastructure and can carry risks similar to high-growth artificial intelligence (AI) stocks. In some cases, they may even include PE-style value enhancement strategies. Under the traditional system, limits and evaluation criteria would differ depending on whether an investment is classified as real estate or infrastructure. However, under TPA, such investments are judged based on their overall contribution to risk and return, rather than their "label."

KIC plans to fully implement TPA next year after gaining experience from the pilot phase starting in July. This would make KIC the first major domestic institutional investor to do so. The National Pension Service has also conducted several rounds of consulting to introduce TPA and is currently applying it only to its alternative investment sector. Some major overseas LPs, such as the Canada Pension Plan Investment Board (CPPIB) and the Government of Singapore Investment Corporation (GIC), adopted TPA in 2006 and 2013, respectively. Over the past decade, these institutions have achieved an average annual return of 8.6%, outperforming the 7.2% average annual return of 566 pension funds that did not implement TPA during the same period.

However, the adoption of TPA marks a dramatic shift from previous management practices, so some friction is anticipated. Above all, there may be discord in organizational management and performance evaluation. Each investment team will no longer simply execute funds allocated to them, but will instead compete for the fund's overall limited liquidity and risk capacity. Internally, resistance may arise to the disappearance of "my share," and performance evaluation may become more difficult.

The private equity industry is also expected to face greater challenges. Previously, there was demand for allocations to maintain the target proportion of alternative investments. Under TPA, however, private equity must compete with all other investment opportunities, including listed equities, bonds, and infrastructure, in order to secure capital.

This content was produced with the assistance of AI translation services.