Korea Investment Corporation (KIC): A Comprehensive Overview

The Korea Investment Corporation (KIC) is a sovereign wealth fundTop 5 Sovereign Wealth FundsSovereign Wealth Funds (SWF) are pools of income – generally derived from staple commodities – that a country uses to invest in areas of possible growth. The majority of the countries that manage sovereign wealth funds are those that rely on a limited number of commodities established by the government of the Republic of Korea on July 1, 2005, under the KIC act. The corporation’s purpose is “to increase national wealth and contribute to the growth of Korea’s finance industry.”

Summary

• The Korea Investment Corporation (KIC) was established on July 1, 2005, through the KIC Act.
• The mission of the KIC is to create national/sovereign wealth and to contribute to the Korean finance industry.
• The KIC typically invests in traditional assets, alternative assets, and special assets and others, with an emphasis on traditional assets.

KIC’s Vision and Mission Statements

Vision

The vision of KIC, as stated on its official website, is “to be a top sovereign wealth fund that serves as a cornerstone of the nation’s economic future.”

Mission

Specifically, there are two mission statements for the KIC:

• To increase sovereign wealth by preserving the international purchasing power of sovereign assets by generating returns on investments
• To contribute to the development of the finance industry

Increasing Sovereign Wealth

In the first mission, “sovereign wealth” refers to the reserve the government (specifically, the Ministry of Economy and Finance) carries. The additional supply of wealth that is accessible to government agencies can act as a buffer in times of economy-wide financial distress by allowing the government to implement policies and programs without having to fall into a large budget deficitBudget DeficitA budget deficit occurs when government expenditures exceed revenues from taxes and other sources. It is most commonly applied to government budgets..

Development of the Korean Finance Industry

Elaborating on the second mission, the KIC aims to promote the globalization of the Korean finance industry, which means to grow its investment network and attract overseas investment professionals.

Organization and Structure of the KIC

Theoretically, the KIC Act stipulates that the sovereign wealth fund shall adopt a corporate governance structure that ensures independence in investments and autonomy in operations from government sponsors.

In practice, the KIC is divided into many levels. At the top of the corporation, there are three levels of senior leadership:

• The Steering Committee
• The Board of DirectorsBoard of DirectorsA board of directors is a panel of people elected to represent shareholders. Every public company is required to install a board of directors.
• The Chief Executive

Steering Committee

The Steering Committee of the KIC is a committee of nine members who make up the fund’s senior management. Traditionally, the nine members include six private sector professionals and three officials who represent the institutions that have entrusted assets to KIC. Specifically, they are the Minister of Strategy and Finance, the Governor of the Bank of Korea, and the CEO of KIC.

The committee’s roles and responsibilities do not include the management and overseeing of the day-to-day operations. Instead, the committee makes decisions that influence the direction of the corporation.

Some of the decisions made by the Steering Committee include:

• Mid and long-term investment directions and policies
• Change in financial status
• Entrustment of public funds and assets to the KIC
• Budget settlement approval
• Appointment of executive officers
• Inspection of the committee/the corporate auditing process

Board of Directors

The Board of Directors at KIC, which also includes the CEO, considers important corporate issues to be referred to the Steering Committee (Article 9, KIC Act). For example, the board will discuss topics such as the use of emergency funds or the amendment to internal regulations of KIC and present such issues to the Steering Committee for further deliberation and resolution.

Chief Executive Officer (CEO)

The CEO oversees the operations of KIC. In essence, the role of the CEO is to implement the decisions made by the Steering Committee and the Board of Directors. In addition, the CEO serves as the chairman to the meetings of the Board of Directors.

The fund’s CEO is appointed by the President of the Republic of Korea upon the Minister of Strategy and Finance’s recommendation through the President Recommendation Committee and the deliberation by the KIC Steering Committee.

Investment Allocation

There are three types of investments made by the KIC. They are:

1. Traditional Investments

The “traditional investments” portfolio pursues “traditional” assets with reduced risk and stable returns. Typically, the assets include publicly-traded securities, such as stocks and bonds. Such a type of assets makes up the bulk of the investments of the KIC.

2. Alternative Investments

To complement the traditional assets, KIC also invests in alternative assets that are based on private contracts and have low liquidity. For example, in 2009, KIC began investing in private equity and real estate and expanded into hedge funds in early 2010.

3. Special investments (and others)

Since KIC started investing in non-traditional assets in 2010, assets that do not fit into the “alternative investments” category are considered in the category of special investments and others.

Special investments, like the other investments, are managed internally and not outsourced. Interestingly, some prominent investments are pursued in collaboration with other sovereign wealth funds or global pension funds.

An Example of Investment Allocation in Q4 2018

At the end of the fourth quarter of 2018, KIC approved the following asset allocationAsset AllocationAsset allocation refers to a strategy in which individuals divide their investment portfolio between different diverse categories (in USD):

• $71 billion in traditional assets under management
• $16.4 billion in alternative assets under management
• $11.6 billion in special and other assets under management

As can be seen above, the KIC places a strong emphasis on traditional assets, while also diversifying into alternative assets and special assets.

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