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Investing assets entrusted by the government, Bank of Korea and public funds in the global financial market

Risk Management

KIC aims to keep risks that arise in the process of
managing entrusted assets within a given range.

We have established a risk management system that provides comprehensive control solutions for managing risk at every step, for not only the front, middle and back offices, but also corporate management.

The Steering Committee reviews and deliberates on risk management policy, while the Board of Directors (BOD) allocates risk limits and risk management guidelines.

The Risk Management Subcommittee (under the Steering Committee) and the Risk Management Working Committee (under the BOD) arrange detailed risk management guidelines via indepth discussions. The Risk Management Division is strictly separated from the Investment Management Division to ensure the independence and autonomy of the risk assessment and investment monitoring processes.

KIC manages market risk, credit risk, derivatives risk, operational risk and legal risk. Quantitative indicators and limits are adopted to measure each type of risk, and each risk indicator is assessed and monitored during the investment process. When key risks exceed limits, the Risk Management Working Committee examines the issue and discusses possible solutions. To supplement quantitative analyses, we also perform various qualitative analyses.

  • Market Risk

    For traditional assets including equities and fixed income, KIC manages the risk levels of excess returns based on benchmarks designated by our sponsors. Public market risk is defined as the volatility of excess returns against the benchmark, and we measure, monitor and set limits using ex-ante tracking error (T/E). During 2019, the exante T/E (minimum - maximum) for KIC’s total portfolio was 32-51 bps and managed within limits. The tracking error for equity was within 47- 68 bps and for fixed income, 35-54 bps. The key source of alpha generation, these tracking errors are effectively allocated and managed in various investment strategies.

    We also use a variety of tools and approaches to prepare for multiple investment risks. Value at Risk (VaR) estimates portfolio volatility in accordance with asset management goals for absolute returns in asset allocation. We also measure and monitor indicators such as conditional VaR (or expected shortfalls) and use stress tests that incorporate both historical and hypothetical scenarios to estimate investment losses from multiple perspectives.

    For alternative investments, the risk management and legal departments conduct due diligence on major investments to monitor risk factors. Through setting various limits, the periodic valuations of investments, quantitative risk analysis such as Value at Risk and stress tests, we engage in quantitative risk management and take various measures to control risk related to alternative assets.

    To supplement the quantitative models, we backtest the effectiveness of various risk models, designate investment-eligible products in advance and manage weights for each asset class, country, currency and sector, the allocation limits for external managers and duration limits.

    We also analyze the portfolio establishment scheme and risk management status of major global institutional investors and have meetings with them in an ongoing effort to improve our risk management system.

    Lastly, we closely monitor financial market trends by reviewing key market risk factors and analyzing their implications from a risk management vantage point.

    We also constantly monitor individual fund returns. In the event that a fund underperforms the benchmark by a certain degree, we review the underlying reasons and prepare solutions. For traditional investments, we restrict investments in countries and products with significant liquidity constraints and regularly monitor portfolio transaction liquidity.

  • Alternative Investment Risk

    The Risk Management Team designates allocation limits for external managers relative to the total net value of our alternative assets and for each asset class. For diversification purposes, the team also monitors the degree of concentration by region, strategy, sector and vintage.

    We review risk factors for each investment plan prior to making any investment-related decisions. For direct investments or projects with significant risk, the Risk Management Team participates in on-site due diligence with the front office and conducts a prior and independent assessment of risk factors.

    Post-investment, the Risk Management Team operates an early-warning system that monitors potential issues related to investment projects. Our team has also adopted and integrated a Public Market Equivalent analysis, relative performance comparison by vintage year and quantitative model analysis for the alternative investment portfolio using private market risk factors.

  • Credit Risk

    KIC classifies credit risks into securities-related credit risks and counterparty credit risks. To manage credit risks from securities, we designate the lowest grade eligible for investments based on credit ratings by Moody’s, S&P and Fitch Ratings, and set investment ceilings by issuers of corporate credit.

    We manage counterparty risks by setting a minimum credit rating, selecting and managing appropriate counterparties and designating exposure limits based on credit ratings. We have also established an internal counterparty assessment system that uses such factors as counterparty credit ratings and various types of credit risk information and have regularly monitored counterparty risks.

    In 2019, we improved the management of special transactions such as FX and derivatives by analyzing the details of those transactions for each counterparty.

  • Derivatives Risk

    Derivatives are invested on a limited basis to enhance returns and make portfolio adjustments. To prevent excessive leverage transactions, we manage relevant risks by designating investmenteligible derivative products and assigning position limits.

  • Operational Risk

    Operational risk management aims to prevent KIC from incurring financial losses arising from risks associated with inappropriate internal processes, employees, systems and external factors. KIC has developed and conducts employee selfcheck surveys to better control operational risk. In terms of organizational structure, we have separated the front, middle and back offices to maintain an effective system of checks and balances. Operational processes for the settlement of accounts and accounting related to the management of entrusted assets, as well as our IT systems, are designed to ensure effective operational risk control. The Chief Compliance Officer oversees all matters related to operational risk management activities independently, to protect the interests of sponsors and prevent financial mishaps.

  • Legal Risk

    To prevent and manage legal risks, we review investment agreements, investment structures and potential issues prior to all investments. We use a post-management system to ensure investment returns and our investor rights. We also analyze domestic and foreign laws as well as legal validity with regard to our investments. Recognizing the growing importance of effectively preventing and properly responding to legal risks, we have expanded our pool of legal experts, provided staff with additional training programs and seminars and are sharing more information with related agencies. We are also working more often with domestic law firms in an effort to contribute to the development of Korea’s finance industry.