Fund is set to begin investing S.K. foreign reserves

The New York Stock Exchange.

But regulations limit it to more stable stocks and bonds

Korea Investment Corp., whose corporate mission is to efficiently use South Korea’s foreign exchange reserves, is now in full-fledged operations. It secured its initial seed money after signing contracts with the Bank of Korea and the Ministry of Finance and Economy on October 12. Next month, Korea Investment Corp. will sign its first contract with a foreign financial company to manage the fund, and on October 23, it will be audited by lawmakers, all steps towards its full operation.

As of the end of September, South Korea’s foreign exchange reserves totaled US$228.2 billion, ranking fifth in the world. However, there has been criticism over the management of these reserves, as South Korea has invested it largely in U.S. Treasury Bonds, a low-yield investment in general and one pinned to the whims of the unstable dollar.

Under the circumstances, market observers are watching if Korea Investment Corp. will be able to "catch two rabbits": both stability and profitability.

Contracts with the Bank of Korea, Finance Ministry

On October 12, Korea Investment Corp. signed a contract with the Ministry of Finance and Economy to manage $3 billion out of the ministry’s nearly $40 billion in foreign exchange stabilization funds. In June, Korea Investment Corp. also signed a contract with the Bank of Korea to manage the central bank’s $17 billion in foreign exchange reserves. The fund thus has $20 billion in seed money.

Korea Investment Corp. has selected Barclays Global Advisors and State Street Global Investor, two global bond managers, as its assets managers. The two foreign companies will manage $1 billion of its holdings after the signing of contracts within the month. In addition, Korea Investment Corp. is now in the process of picking asset managers to begin managing an additional $4.2 billion ($3.6 billion in bonds and $600 million in stocks) early next year. Korea Investment Corp. will float all of its seed money by next year and it will also use part of its own holdings.

Stocks and bonds

By law, Korea Investment Corp. can invest in stocks, bonds, foreign currency, derivatives, and real estate. However, guidelines set by the Bank of Korea and the Ministry of Finance and Economy have more power over the fund’s actions than the law. The Bank of Korea is believed to require Korea Investment Corp. to invest its holdings in only stocks (30 percent) and bonds (70 percent). In case of funds from the Ministry of Finance and Economy, the limit on stock investment is 40 percent.

"Compared with the Bank of Korea, we give more room for Korea Investment Corp. to invest," a ministry official said. However, the ministry has also banned Korea Investment Corp. from investing in property or derivatives.

The Government Investment Corp. of Singapore, which Korea Investment Corp. hopes to emulate, is known for its aggressiveness by investing in property and private equity funds. But Kwon Tae-kyun, director of international finance at the ministry, said, "Rome wasn’t built in a day...Korea Investment Corp. should expand its investment territory step by step."

Stability or profitability?

Such guidelines by the Bank of Korea and the Ministry of Finance and Economy represent the dilemma faced by Korea Investment Corp. It must stick to ’stable’ investments, but if the fund loses money, it will be heavily criticized because it is using taxpayers’ money, and even if it fails to generate enough profit, it will be faced with questions regarding its necessity.

Hongik University professor Jeon Seong-in said, "The top priority for using foreign exchange reserves is liquidity, not profitability." Jeon accused Korea Investment Corp. of gambling with people’s money.

However, a fund manager said, "Korea Investment Corp. will be rendered meaningless if it sticks to stability by investing in merely stocks and bonds."