♠ Posted by Emmanuel in Casino Capitalism at 10/22/2008 11:55:00 AMYou don't need to tell me that it's hard to know what to invest in nowadays. It must be doubly difficult for sovereign wealth funds (SWFs) tasked with getting returns above those offered by traditional reserve assets like the sovereign debt of industrialized countries. Just ask China's CIC. Today, however, we feature another sovereign wealth fund coming under criticism. Unlike China where debate about state decisions are muzzled once they reach a certain level, South Korea is more democratic in nature--to a point. SWF Radar pointed me in the direction of this Korea Times article noting that South Korea's SWF, the Korea Investment Corporation (KIC), is now being criticized by that country's lawmakers for investing in Merrill Lynch. If you will recall, KIC chipped in $2 billion early this year to help keep the bank afloat.
Many things have happened since then. Merrill Lynch has since been acquired by Bank of America. More importantly, the value of KIC's equity holdings have kept dropping along with the global sell-off in equities. Especially now that Korea is trying to put out fire after fire at home, it's galling that its SWF is coming a cropper:
Lawmakers battered the Korea Investment Corporation (KIC) for its huge investment losses at a National Assembly audit, Tuesday. One of them said KIC has no reason to exist as trade account turned into a deficit. Rep. Kim Hyo-seuk of the main opposition Democratic Party (DP) criticized KIC which lost 850 billion won [about $630M at current exchange rates] in its investment in Merrill Lynch. ``It recorded 32.5 percent investment loss in nine months,'' the lawmaker added. He said KIC should be totally banned from investing in stocks.
``The KIC fund is composed of the foreign exchange reserves of the Ministry of Strategy and Finance and the Bank of Korea. It isn't like sovereign funds of other countries. Stability should be its first priority,'' the lawmaker said. He said KIC shouldn't use foreign exchange reserves for stock investments.
Rep. Kang Sung-jong, also of the DP, pointed out that Merrill Lynch was KIC's first direct investment since its launch. He compared the $2 billion investment to picking a fruit that is just about to rot. He also criticized that KIC does 62 percent of its investment through an outside management firm. ``KIC has 69 people, including executives, and 36 among them are investment professionals. However, these professionals have made only one investment so far, Merrill Lynch."
Rep. Na Seong-lin of the governing Grand National Party said KIC has no reason to exist. ``KIC was set up based on the overly positive outlook on foreign exchange reserves and the wrong premise that the trade account surplus will continue,'' the lawmaker said. ``Now that it has been proved that the premises can't continue, KIC seems to have lost the reasons for its existence.''
The lawmaker said sovereign wealth funds are generally set up by exporters of oil or raw materials, or with a government account surplus. ``Once the national pension starts payment en masse, government finance is expected to be in deficit. The current account deficit has also been continuing since November 2007.'' He also criticized KIC for making too much indirect investment as it increases the asset management commission burden on the central bank and the finance ministry.