So You Want to Run a Sovereign Wealth Fund

Korea's Scott Kalb offers some tips and "deep thoughts"

March 23, 2011

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want adThe Korea Investment Corporation’s Scott Kalb continues to say interesting stuff. So, while the KIC’s CIO was already an honored recipient of a “deep thoughts” award in 2010, I’ve decided to include him again in the 2011 lineup of ‘deep thinkers’. This decision was based on a neat little article over on aiCIO, in which Kalb talks candidly about running a SWF and even offers some advice to would-be SWF managers. So without further ado, here are some more deep thoughts by Scott Kalb:

“It’s a great responsibility to be managing a sovereign wealth fund portfolio, and a credit to the Korean government to bring in someone foreign to help move the organization to the next level.”

“I worry that some perceive the KIC to be politically run. We may be 100% owned by the government, but we operate 100% like a private asset management company. It’s worth noting that the KIC can’t make an investment decision until the Board of Directors and I sign off on it. No one in the government has ever backed us up against a wall and said ‘you have to make this investment.’ It’s very hands-off.”

“About 50% of the world’s SWFs have been established within the last decade, in line with the growth in surplus reserves in many trading and commodity-based economies.”

“The KIC is prohibited by law from investing domestically, and is only allowed to invest overseas. In addition, we have no liability stream. This makes us natural long-term investors.”

“My job has been a lot about architecture and path-finding: chopping down barriers, building platforms, and pointing out the right direction. Our biggest initiative in 2009 was the launch of the alternative investment program—introducing private equity, hedge funds, real estate, and commodities. Last year, our biggest initiative was the launch of our strategic investment program, taking direct stakes in companies. At this stage, we’re about 15% in the alternative/strategic space and 85% in public markets.”

We’re interested in sectors where there is a structural deficit in the Korean economy, so we can make a return while also helping to address that structural deficit. We’re also interested in industries where Korea may have a competitive edge, providing synergy for Korean companies as they continue to expand overseas.”

“My final advice: Do your best to overcome the tyranny of the benchmark; we saw the consequences of following the benchmarks closely during the financial crisis. Benchmark investing doesn’t demand good technique. It’s not particularly strategic. Nor does it help much with risk management. We want to be anchored by our benchmarks, not be ruled by them.”

The most interesting bit in this is to hear that, while the fund is completely apolitical, the managers still consider national interests in their investment decisions. As Kalb says, he wants to make a return AND help address structural deficits or provide synergies with Korean firms. I’d love to learn more about how that policy is actually implemented in practice. Do they receive a wish list from the government? Is there a report that highlights the deficits and synergies for the KIC? Or are these extra-financial metrics integrated into investment decision-making on an ad-hoc basis? Apparently, we need even more deep thoughts by Scott Kalb.

This post originally appeared on the Oxford SWF Project website.

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