Last July, for example, the fund published its 2013 annual
report on its website before
. The report
finally resurfaced on the site in September — minus
some underwhelming performance figures for alternative asset
Fast-forward eight months and KIC’s 2014
Korean language annual report and English language audited
statements are generating more bewilderment among those who
are sifting through their numbers. Most interesting: The
Korean-language document states the fund’s
assets under management surged to $84.7 billion over the
twelve months to December 31, 2014, up 17.6 percent from
the $72 billion figure recorded for end-2013. Impressive
figures, to be sure — but the report does little
to explain the increase.
In an emailed response to questions KIC spokesperson
Nayoung Sung attributed the rise in assets to "both [the]
fund’s investment return and capital inflow
from KIC sponsors". But according to the data provided in
the report, KIC’s investments returned 3.8
percent ($2.7 billion) in dollar terms — decent
gains, but not nearly enough to account for the $12 billion
rise in the fund’s overall value. Similarly,
KIC’s audited accounts reveal that it received
a capital injection from the Ministry of Strategy and
Finance of KRW 172 billion ($157.6 million) over the
period. Again, the numbers don’t add up.
"Lack of Clarity"
Sven Behrendt, founder of Geneva-based consulting firm
GeoEconomica, says the report has left him confused. "[The
growth in assets] could be from currencies," he speculates.
That’s possible — KIC holds its
assets in a basket of different currencies, and discloses
its percentage returns on individual asset classes in both
dollar terms and the currency basket. For instance, the
fund’s equity investments returned 4.8 percent
in dollars and 10.9 percent in the currency basket.
Muddling the issue, however, is the fact that the
overall rise in assets was reported in dollars, which
remained extremely strong over the reporting period.
Behrendt, for one, has experience with opacity of the
KIC’s disclosure. "The lack of clarity is
frustrating," he says. Trying to decipher the 2013 report
was especially so. "I remember shouting at the computer
screen," he says.
Interestingly, the surge in assets has occurred at a
time when the fund appears to have been removing risk from
its portfolio. After lowering its allocation to fixed
income in 2013 as it hunted for higher returns, it reversed
itself, moving heavily into bonds last year, increasing its
allocation to 39.2 percent as of December 31, 2014 from
34.3 percent a year earlier.
Equities, meanwhile, were reduced to 43.8 percent from
48.4 percent, while alternative assets were down slightly,
from 9.3 percent to 9 percent, despite Chief Investment
Officer Heungsik Choo’s stated goal of raising
the fund’s alternatives exposure to 40 percent
by 2017. This asset allocation suggests the fund is
emphasizing liquidity over investment return.
KIC’s report raises other questions. For
example, the audited financials show that KIC bought a 40
percent stake in an investment vehicle named K-REALTY
last year for around KRW 16 billion ($14.6 million).
K-REALTY was used by Seoul-based, New York-listed
conglomerate KT Corp. to buy HMLC Co., a company that
owns an office building in the center of the Korean
That might not seem unusual. Many sovereign funds
target commercial real estate in Seoul. Indeed, on Monday
this week, Singapore’s GIC announced it had
teamed up with the Canada Pension Plan Investment Board
(CPPIB) to buy a shopping mall in the city from Daesung
Industries for $263 million. But KIC’s
founding legislation proscribes it from investing in
domestic real estate.
In the emailed note, Ms. Sung clarifies this point.
She says that while the founding legislation does indeed
prohibit investment in domestic assets, the rule in
practice only applies to KIC’s allocation of
the original seed capital it received from the
government. The fund is free to reinvest its own profits
in whatever assets it sees fit — including South
Korean real estate. How the fund distinguishes between
seed capital and its profits is not clear.
And KIC’s overall rise in assets during a
period of apparent retrenchment remains mysterious.
Behrendt says some confusion may derive from the fact
that KIC’s audited reports pertain to the
fund as an investment management entity, not the
performance of the underlying portfolio that it oversees.
The Santiago Principles on corporate governance oblige a
fund to prepare its annual report and other financial
statements in accordance with recognized international or
national accounting standards. KIC used accounting
standards for non-public entities in the Republic of
All things considered, KIC’s public
notices habitually raise questions for stakeholders
seeking to fathom the sovereign wealth
fund’s status and performance. This may have
something to do with the fund’s
preoccupation with its reputation.
Last summer, for example, Choo spoke at a regional
investment conference and took the opportunity to lament
the fact that KIC’s standing on the
international markets remains "not all that favorable",
despite strong performance in recent years. The
fund’s five year return on assets under
management through 2013 was 8.3 percent
In his speech, Choo said that critics tend to fixate
on KIC's investment in Merrill Lynch & Co. The fund
invested $2 billion in the troubled U.S. brokerage firm
in January 2008 alongside the $548 billion Kuwait Investment Authority,
sustaining substantial losses. Choo urged critics to look
instead at the fund’s robust overall returns
since the 2008-’09 financial
Aware that its missteps are scrutinized, KIC seems to
have taken to holding its cards close to its chest. It
provides only the minimum of information in its public
When the 2013 annual report re-emerged last September,
for example, it lacked some key performance metrics. The
revised report no longer included the three-year
annualized return figures for hedge funds, private equity
and real estate. These had shown that while
KIC’s overall alternative investment
portfolio grew strongly over 2013, its three-year returns
of 4.7 percent lagged its benchmark of 4 percent over G7
The original report also revealed that direct
investments generated only 1.4 percent on an annualized
basis as of the end of 2013, compared with 10.2 percent
for its private equity fund holdings. In October 2014
KIC’s CEO Hongchul Ahn wrote in an emailed
note to journalists that direct
investment returns had been disappointing and that the
fund would be more circumspect in selecting deals in the
KIC is certainly not the least transparent of funds.
GeoEconomica, for example, last year gave the fund a B on
its A to F grade scale for compliance with the Santiago
Principles — or "broadly compliant".
KIC's reticence may well suit its needs, at least from
a political standpoint. But it’s leaving
financial analysts with plenty to ponder.