[Institution Perspective] '24 Trillion Big Player' Noran Usan Catches Two Rabbits of 'Safety and Profit'

Recently, Lee Doyoon, Head of Asset Management and Chief Investment Officer (CIO) of Noranwoosan, whom I met at the Korea Federation of Small and Medium Business offices in Seoul, recalled the time when he took office three years ago in relation to the recent large-scale loss incident involving Hong Kong H-index-linked Equity-Linked Securities (ELS). "When I came, I saw that the investment proportion in ELS was extremely high. I immediately banned it. Fortunately, we stopped it then; otherwise, it would have been a disaster now." He was appointed as Noranwoosan CIO in May 2021 and successfully renewed his term last year.

ELS are derivative products sold by securities firms or banks. They are mainly linked to stock indices, and returns are determined according to the index. They are classified as 'medium-risk, medium-return' products that can yield about 8% annual returns if the index does not fall below half its level. However, as the Hong Kong H-index halved, a recent large-scale loss incident has occurred. This CIO said, "Not only ELS but also high-risk real estate project financing (PF) have all been completely cleaned up since I arrived."

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Since ELS and PF carry high risks, their returns are also high. It means giving up the 'weapon' to generate stable cash flow and profits. According to this CIO, Noranwoosan prioritizes 'safe management' even more than other typical mutual aid associations. He said, "I think Noranwoosan is the 'last bastion' for 7 million small business owners, so our investment perspective is somewhat different." Noranwoosan is a public mutual aid system operated to help small businesses and small merchants maintain stability in life and provide opportunities to restart their businesses from threats such as closure or old age.

While prioritizing safety, it has also achieved decent returns. In 2022, despite the global stock market downturn, it performed well with a return of -1.88%. At that time, many pension funds and mutual aid associations recorded returns worse than -5%, including the National Pension Service, which posted the worst-ever return of -8.22%. The 2023 return was tentatively estimated at 5.34%, the highest in the past five years. It has caught both 'structural improvement' and 'profitability.'

Instead of investing in ELS, ETF investments were entrusted to portfolio managers. Unlike ELS, which only requires putting money in, ETFs require direct trading, so there were some complaints initially. This CIO said, "In the past, since we only outsourced management, even when the situation was bad, the stock managers smiled as if it had nothing to do with them." He added, "I scolded them a few times, and as they began to enjoy trading, the atmosphere changed so much that now they stay up all night in group chats discussing market conditions and trades." He also said, "Now, no matter what you ask, the employees (portfolio managers) know everything," and "I often hear from others that the employees' eyes have changed."

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Noranwoosan's Assets Under Management (AUM) stood at 24.7339 trillion won as of 2023. By asset class, bonds account for the largest share at 52.4%, followed by alternative investments (28.0%) and stocks (16.6%). The remaining 3% is short-term funds. AUM increases by about 2 trillion won annually. During the COVID-19 period, when many businesses closed, it gained rapid popularity among self-employed people. This was because Noranwoosan mutual aid funds are protected by law from seizure, transfer, or collateral provision. As of October last year, there were 1.72 million registered members, and 6.5 trillion won in mutual aid funds had been paid to 700,000 people.

This CIO said, "In the mid to long term, since interest rates are still high, bond investments will continue steadily," and "Regarding alternative investments, equity (stake investments) still seem somewhat inflated, so we are focusing on private debt funds (PDF) and acquisition finance." He expects that as the economic recession increases the number of 'zombie companies,' demand for private debt with attractive conditions will rise. Additionally, this year, they plan to establish a blind fund investing in acquisition finance for the first time. Acquisition finance refers to the funds borrowed externally by acquirers during mergers and acquisitions (M&A). He said, "Previously, we directly reviewed acquisition finance investments, but the procedures and time took too long, so we are trying other methods."

Regarding secondary (purchase of existing shares) fund investments, which involve acquiring existing fund shares instead of direct investments, the plan is to continue focusing on funds led by limited partners (LPs) rather than general partners (GPs). This CIO said, "Since many LPs want to exit as venture funds mature, I think there will be good timing to acquire at reasonable prices." According to the Ministry of SMEs and Startups, from this month until the end of the year, a total of 351 venture funds will mature, with a commitment amount of 8.4531 trillion won, the largest ever. Because of this, a boom in secondary funds is expected.

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