"Crisis Comes Like a Cliff, Not a Staircase"

Risk Response Strategies of Top 5 Asset Management Firms
Liquidity Management, Reduced Real Estate Investment, Monitoring of Marginal Companies

[Asia Economy Reporter Park So-yeon] The dominant outlook this year is that domestic and international uncertainties will remain high. The environment surrounding our economy is challenging, with concerns over deteriorating corporate earnings, liquidity crunch due to high interest rates, and geopolitical risks. Asset management companies managing hundreds of trillions in assets are focusing all their efforts on devising risk strategies to respond sensitively to the rapidly changing market conditions this year. The keywords for this year, as mentioned by risk management heads of each asset management company, can be summarized as 'liquidity management,' 'analysis of marginal companies,' and 'reduction of real estate exposure.'

Liquidity management and monitoring of marginal companies are top priorities. Tae-jun Jeong, Head of Risk Management at KB Asset Management, said, "Due to high interest rates and other factors, corporate earnings deterioration and insolvency in some business sites in the real estate sector are expected," adding, "We plan to strengthen monitoring of marginal companies or business sites from the perspective of credit risk management." Jeong also stated, "From the perspective of liquidity risk, we plan to thoroughly manage fund liquidity to be able to respond whenever customers request redemptions." He added, "Currently, KB Money Market Fund (MMF) does not include any real estate project financing (PF) asset-backed commercial paper (ABCP), so it is stable," but "to respond to any potential liquidity issues, we will conduct more thorough monitoring of the underlying assets of ABCP."

Credit risk monitoring will also be strengthened. Jeong emphasized, "In cooperation with the credit strategy team, we will strengthen monitoring of marginal companies such as those with high debt ratios and proactively respond to credit events." Additionally, thorough pre-risk review and post-management of alternative investment assets such as real estate and infrastructure funds are planned.

Given the uncertain market conditions, proactive investment recovery reviews and scenario analyses by financial market factors are also necessary. Young-sik Jo, Chief Risk Officer (CRO) at Shinhan Asset Management, forecasted, "Following last year, this year is also expected to see credit spread widening due to the interest rate hike trend, asset value adjustments, downside risks to the economy due to high raw material prices, and a real estate market downturn." Jo CRO said, "We plan to identify and respond promptly to abnormal signals in portfolios through stress test verification amid increased market volatility," adding, "scenario analysis of potential loss risks by financial market factors is necessary." Proactive investment recovery plans for maturing alternative investment fund assets will be established, and in-depth monitoring such as quarterly checks of key management indicators of existing investment assets will be conducted. He explained, "For new corporate investments, thorough verification will be conducted for high-carbon emission industries, economically sensitive industries, and industries with potential risks to manage climate risks."

There was also a warning based on experience that crises come suddenly like a cliff rather than stepwise. Kook-tae Kim, Head of Risk Management Division at Mirae Asset Asset Management, said, "When volatility in the capital market increases, crises tend to come all at once rather than gradually," expressing concern that "the asset value invested with an expected risk level may fall to an unexpected level, causing liquidity, credit, and counterparty risks to appear simultaneously." Kim emphasized, "We will carefully prepare by analyzing scenarios centered on events that can significantly impact the cash flow of investment assets to ensure optimal investment decisions," adding, "Portfolios should be diversified enough through risk factor analysis." He also mentioned, "We will manage downside risks by examining the liquidity and financial soundness of individual companies and seize opportunities to invest in high-quality assets at competitive prices for new investments."

Chang-joo Lee, Head of Risk Management Office at Hanwha Asset Management, advised, "Prepare for the possibility of complex events." Lee emphasized, "It is necessary to advance crisis management processes such as refining stress tests." This means strengthening proactive response capabilities to increased credit risk due to unfavorable macroeconomic variables, liquidity contraction, and credit crunch concerns.

There is also a perspective that flexible responses are needed rather than being trapped in negative outlooks. Fixed investment strategies based on negative forecasts can instead become risks. Jae-hwan Shim, Chief Investment Officer (CIO) at Korea Investment Trust Management, said, "It is necessary to prepare for the possibility that the bleak market outlook may be wrong," adding, "If raw material prices and service inflation stabilize, inflation may ease, and as governments' policy response capabilities gradually improve, investment sentiment could recover." Shim CIO said, "The market could proceed to a phase of stock market rises and slight interest rate increases," and "We will keep positive possibilities open rather than following market consensus, focusing on systematic management and risk control for stable operation rather than overly pursuing returns." He added, "For stocks, we will buy undervalued cyclical stocks at low points to increase their weight, and for bonds, we will manage appropriate recovery periods in case interest rates do not decline as the market consensus expects." Regarding overseas stocks, he expects Asian countries such as China to benefit more from economic recovery than advanced countries like the U.S., so plans to increase the weighting of emerging markets.