Below is the transcript of a CNBC Exclusive interview with Choi Heenam, Chairman and Chief Executive Officer, Korea Investment Corporation. The interview was first broadcast on CNBC's Squawk Box Asia on 17 September 2018.
All references must be sourced to a "CNBC Interview'.
Interviewed by CNBC's Amanda Drury
Amanda Drury (Mandy): Thank you very much for joining us today.
Choi Heenam (Choi): Thank you for having me.
Mandy: We are now 10 years after the collapse of Lehman Brothers, how much safer are we now?
Choi: In general, I can say we are safer than before in various aspects. First, I'd like to say that current economy cycle is kind of in a late cycle, not like 10 years ago. 10 years ago, the global economy was in recession. So, we are more prepared than before. And second, just to look at some emerging markets, even though there are few countries suffering from external shocks, mostly the emerging markets are well prepared in terms of safety net, global safety net, regional safety net, and bilateral safety net. They are well prepared. And secondly, during last 10 years, many emerging markets they did structural reform, I mean they have stronger economic fundamentals than before.
Mandy: Even though you think we are safer now than before, where do you think the next crisis could come from and are we close to it?
Choi: When the economy continues to grow, not only the federal reserve but also other central banks might start to do tightening monetary policy then only certain, some emerging markets might suffer liquidity squeeze that might cause another potential risk.
In addition to that, there are non-economic factors. I mean trade war, trade dispute, geopolitical risk might be potential risk factors to affect the global economy. But I think trade dispute is not easy to solve because the epicenter of the trade dispute is who lead global growth in the next decade. So U.S. and China are, you know, even though they make every effort to tackle the trade dispute but question is how can you quickly solve it? On that issue I'm a little bit negative.
Mandy: And Korea is still very reliant on exports. China is both a competitor and a trading partner for South Korea. So how are the tariffs affecting South Korea so far and does it affect your investment strategy?
Choi: First, if the trade friction becomes severe then China's export to global economy, I mean mainly through U.S. will be affected negatively then our export to China is around twenty five percent. Our main export items are parts and intermediate goods, not consumption goods. So our export is mainly used for China Chinese export to globally. So trade dispute, if China is severely affected by the U.S. tariff then our exports might be affected by those trade disputes.
Mandy: But it doesn't affect your investment strategy at KIC?
Choi: To give you our whole picture of our investment, our investment more than 90, 92 percent is toward of advanced economy not emerging market so less there might be limited effect from the trade dispute.
Mandy: You were appointed to this position in April and you planned to make the KIC of the world's leading sovereign wealth funds.
Choi: I hope so.
Mandy: How do you plan to do that?
Choi: Our first you know the pie is showing our capacity in generating returns. So we did a lot of effort. First, our invest approaches based on our research base so we increased our research capacity, also to localize our investment. We set up overseas branch in London, the EU, even in Singapore here last year. So we managed our assets locally, more local based investment. So that may increase our capacity to generate returns. Second, we're close to other asset owners, like the Canadian pension funds, and many other asset owners. So in Asia, to manage our official reserve we try to expand our coverage for institutional investors.
Mandy: I see that you've returned just over 16 percent on investments last year, for 2017, much more than the year before. What do you hope to achieve this year on your return on investment?
Choi: That's a pretty difficult question. You know we tried to beat the benchmark but the way to increase returns is to increase our capacity on asset allocation. So this year we tried to, actually we did strategic tilting. I mean a slight change portfolio position from equity to bond, bond to alternative asset kind of thing. So by doing strategic tilting or asset allocation, we do our best to show our capacity.
Mandy: Your original mandate was for outbound investment.
Mandy: But is there a case to domestically invest as well and support domestic industry?
Choi: No. By KIC law, we are not allowed to invest domestically, our whole investment for overseas investment.
Mandy: Where do you see the best opportunity overseas?
Choi: Overseas for the time being, still we have a strong belief in emerging markets even though we are cautious. So we tried to increase our exposure to emerging markets especially Asia Pacific region.
Mandy: Emerging markets are going through some problems…
Choi: Yeah sure
Mandy: Does that create good value for you?
Choi: Yeah I believe. I think so.
Mandy: What about hedge funds? Your allocation to hedge funds was cut last year. What about this year? Is it being upped or cut again or is it the same?
Choi: We continue to increase our exposure to hedge fund. So recently we selected some external manager hedge funds to increase our exposure to hedge funds.
Mandy: With increased exposure to hedge funds does that means that you are chasing shorter term returns?
Choi: No, hedge fund is a kind of long term investment not traditional so we tend to invest long.
Mandy: What about infrastructure assets? I was speaking with someone yesterday here at the Singapore Summit from the Canadian Pension Board and they were saying that in developed countries they want to find good infrastructure assets but there is high demand and low supply.
Mandy: Are you finding that problem as well?
Choi: Yes. Because in advanced economy it is not difficult to find the appropriate infrastructure. But in emerging markets, infrastructure is quite a complicated asset because it heavily depends on the domestic regulation. So to have a transparent system regulation is very important to attract foreign money to domestic emerging markets infrastructure.
Mandy: I understand that this time last year and you weren't the head of KIC but nonetheless this time last year the KIC announced a 300 million dollar commitment to environmental social and governance, ESG investment fund
Choi: ESG yes we did
Mandy: ESG is very popular right now it's politically very palatable. It sounds good but does it also generate good return?
Choi: Yes. As you mentioned we started our ESG investment this year 300 million U.S. dollars so it's a first step. But I believe, as a responsible investor we need to increase our ESG investment. But with regard to returns, I'm not quite sure the returns will be better than general investment in short term but in the long run I have a strong belief that ESG investment will produce better returns.
Mandy: This is a political question. But your president Mr. Moon is one year into a 5-year term and there is some concern that his economic reform is not gaining as much traction as some people would like. What is your reading on it?
Choi: Ah yes because new government, to adopt a new economic policy quite different from previous governments. So it's going to take time to take effect. So you have to wait to see the real result of the new economic policy. So some people might complain about that but it takes time.
Mandy: What do you see at the KIC as your biggest opportunity and your biggest challenge when you face the investment climate now?
Choi: The challenge is the global market. Our performance, our return is heavily dependent on global market. So you know to overcome those kind of challenges, we decided to increase our alternative investment. Now currently 15 percent our AUM is invested in alternative asset. But we try to increase that portion to 20 percent by 2020. So alternative asset, as you see is a long term investment not affected by market fluctuation.
Mandy: My final question is in regards to North Korea. How do you feel about the current ongoing negotiations with President Trump. And do you see potential future investment opportunity with North Korea if things go well?
Choi: It might be too early to say. It takes time but I'm quite sure those days will come. As you know I am an offspring of North Korea defector. My father was from North Korea Pyongyang. So I hope in the future two Koreas are living together peacefully and in the end might be one Korea. So there might be huge investment opportunity but I don't know when will come.
Mandy: Thank you very much Mr. Choi. It's been a pleasure to talk to you.
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