[In-Depth Look at Pension and Mutual Aid Funds]⑧ 3 Years of Accumulated Dry Powder Aimed at AI... Police Mutual Aid Association's Investment Clock Ticks Again

Prolonged CIO Vacancy, Short-Term Funds Swell to 21.5%

Alternative Investments: From 51% to 64%, Adjustment Still Incomplete

Resuming Delayed VC and PE Commitments... Betting on AI

Editor's NotePublic pension funds and mutual aid associations have long established themselves as core players in the capital market. Although their basic mandates differ—public pension funds are focused on securing citizens’ retirement income, while mutual aid associations aim to grow members’ assets and expand welfare—they also show distinct differences in asset size, investment strategy, and organizational structure. This series offers an in-depth analysis of national and international institutional investors and their capital flows.

The Korean National Police Mutual Aid Association went a long time without a chief investment officer (CIO) overseeing its capital. Since October 2023, the CIO position had been vacant, and as a result, funds not being invested swelled to 21.5% of investment assets. It was not until June of last year, when Kang Seungo, former head of Shinhan Investment Corp., was appointed CIO, that a 2-year and 8-month leadership void was finally filled. With Lee Youngsang inaugurated as Chairman in April last year and the CIO position now addressed, the association’s investment clock began to tick again.

Short-Term Funds Stagnated for 3 Years... Investment Engine Restarts

The aftermath of the halted investment engine is clearly seen in the short-term cash holdings. These are standby funds not allocated to alternative investments, bonds, or equities, and are temporarily parked for future allocation. Internal asset management regulations at the Police Mutual Aid Association stipulate that such funds should be managed for no longer than 3 months, meaning the money should be redeployed within a quarter.

At the end of 2022, short-term funds stood at 19.2 billion won (0.4%). This jumped to 484.9 billion won (9.4%) in 2023, then to 1.0071 trillion won (17.3%) in 2024, climbing further to 1.4701 trillion won (21.5%) by the end of last year—a 76-fold increase over 3 years. Other mutual aid associations typically keep short-term funds at about 5% of assets, showing just how far the Police Mutual Aid Association strayed from the normal range. This was the direct consequence of the Financial Investment Review Committee, the body that approves new investments, being unable to function properly due to the leadership vacuum, particularly the lack of a CIO.

As capital pooled on the sidelines, overall investment allocation was also affected. The proportion of alternative investments to total investment assets declined from 68.2% in 2022 to 60.2% in 2023, then 53.2% in 2024, and finally to 51.0% by the end of last year—a three-year consecutive decrease. Other institutions also saw a relative decline in alternative investments due to the stock market boom, but for different reasons. For the Police Mutual Aid Association, this was not the result of asset class rebalancing but rather stemmed from a paralysis in decision-making.

This year, the association is targeting a reduction of short-term funds to 4.4%. Meanwhile, it plans to boost alternative investments by over 13 percentage points to 64.1%, increase bonds from 19.7% to 21.8%, and raise equities from 7.8% to 9.7%. For fixed income, given recent expectations of rising interest rates, the association plans to closely monitor purchase timing and rate levels. In a rising rate environment, newly purchased bonds yield higher interest income, so the association will pursue a laddered strategy with shorter maturities to secure high yields by spreading bond purchases over time.

Last year, the Police Mutual Aid Association had also announced an allocation plan to reduce short-term funds to 4.8% (280 billion won) and raise alternative investments to 65.6% (3.8624 trillion won), but these plans fell through due to a lack of leadership. The share of short-term funds grew even larger, while alternative investments declined. This year’s targets are essentially unchanged from last year’s aspirations—the key difference is that there are now people responsible for implementing and being accountable for these plans.

The scale of change is substantial. To lift alternative investments from 3.4771 trillion won to the 4 trillion won range, roughly 600 billion won in fresh commitments will be needed. Since blind funds (blind pool funds) have a time lag between commitment and actual capital call, the new CIO’s first test will be how quickly they can make up for the 2 years and 8 months of lagged investments.

Balancing Stability with Stock Market Volatility

The Police Mutual Aid Association states that its mission is to manage members’ funds stably, minimizing investment losses and thereby boosting returns. The target investment return for this year is also set at 5.0%.

While returns may not be spectacular, volatility has been low: 5.6% in 2021, 5.0% in 2022, 5.4% in 2023, 6.0% in 2024, and 7.9% at the end of last year. In 2022, when both stocks and bonds collapsed and the National Pension Service posted -8.22%, the Teachers’ Pension -7.75%, and the Government Employees Pension Service -6.00%, the Police Mutual Aid Association managed to remain in positive territory. Its reserve ratio—the level of assets compared to payouts owed to members—has also held steady near 110% annually.

The total assets have surged as well. From just 1.0823 trillion won in 2006, assets have grown every year, reaching 7.6243 trillion won by the end of last year.

While prioritizing stability, the association has also adopted flexible strategies to avoid missing momentum during stock market rallies. At the end of last year, it raised the upper investment limit for equities (both direct and through mandates) from 10% to 15%. Due to policy momentum such as the amendment to the Commercial Act, the domestic stock market climbed, boosting the association’s overall return to 7.9%. The return on equity holdings alone hit 28.5% last year, soaring by 16.9 percentage points from the previous year’s 11.6%.

However, the market has become extremely volatile again, prompting attention to the association’s coping strategy. By the end of last month, the KOSPI had fallen to 5,663.24, down 33.19% from end-May (8,476.15). With the stock investment limit more than doubled right before the bull market ended, timing the deployment of this buffer will be a crucial decision for the new CIO.

First New Commitments in 10 Years... Betting on AI

Capital commitments are also set to ramp up. In January, the Police Mutual Aid Association announced a venture capital (VC) commitment of 60 billion won and a private equity (PE) commitment of 120 billion won. The VC allocation is the first in 6 years, and the PE allocation comes a decade after the previous round in 2016. For the VC commitment, K2 Investment Partners, Woori Venture Partners, and SBVA were chosen as general partners (GPs), each allotted 20 billion won. In PE, BNW Investment, Genesis Private Equity, and Keystone Partners were each allocated 40 billion won as GPs.

The association is also evaluating investments in infrastructure and private debt to navigate the interest rate environment. Earlier this year, consensus pointed to a U.S. base rate cut, but now, due to rising geopolitical instability, a rate increase is considered more likely. As the appeal of financial sectors with rate-linked structures rises, the Police Mutual Aid Association plans to overhaul its portfolio and respond proactively.

As it reorganizes its strategy, the Police Mutual Aid Association is especially eyeing artificial intelligence (AI) as a theme. In the latest round of commitments, it mandated that over 150% of committed capital must be invested in areas of innovative growth such as ICT, digital, semiconductors, display, and AI. A representative of the association said, "AI is a medium- to long-term, structural trend; thus, we see companies in the AI value chain, as well as data centers and power grids (AI infrastructure), as a new investment axis. In the process of selecting GPs, we will give major weight to their sector analysis abilities and execution experience."

-End of Series-

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