[2024 Risk Management] ③ "The Keyword is 'Balance'... Advantageous Asset Allocation Centered on TDF"

Normalization Timing of Diversified Investment... Balanced Stocks and Bonds
Increase Pension Assets Through Pension Account Investments
'TDF' Promising for Automatic Asset Allocation by Retirement Cycle

Editor's NoteLast year, the investment market was shaken by the US interest rate hikes and geopolitical conflicts. Now it is 2024. This year, the US is expected to gradually lower its benchmark interest rate. Important elections in various countries, including the US presidential election and the Korean general election, are also scheduled one after another. Amid various variables, what strategies should investors adopt? We met with experts from major domestic asset management companies in the fields of exchange-traded funds (ETFs), stocks, and pensions to review last year's investment market and hear about risk avoidance measures and investment strategies for this year.

Three experts interviewed by Asia Economy?Kim Seong-hoon, Head of ETF Business Division at Hanwha Asset Management; Song Jun-hyuk, Head of Growth Division at Baering Asset Management; and Son Su-jin, Head of WM Pension Marketing Division at Mirae Asset Management?emphasized the importance of diversification and installment investment from a risk management perspective as the 2024 investment strategy. Proper diversification between stocks and bonds can provide a buffering effect. They especially actively recommended diversification through exchange-traded funds (ETFs). They also stated that efforts to properly assess the appropriate stock price are essential to increase returns. They predicted that market volatility will be high this year due to a series of major elections in several countries, the US interest rate cuts, and economic factors. The conflict between the US and China was also cited as a variable.

Sujin Son, Head of WM Pension Marketing Division at Mirae Asset Global Investments [Photo by Mirae Asset Global Investments]

"2024 will be a year that requires a balance between stock and bond investments."

Son Su-jin, Head of WM Pension Marketing Division at Mirae Asset Management, whom we met recently at the Mirae Asset Management office in Jung-gu, Seoul, emphasized the need to find investment balance. When asked about recent market conditions and this year's outlook, Son said, "We need to look at the past three years together. Last year, due to sharp interest rate hikes, almost all assets including stocks and bonds suffered losses. It is rare to see both perform poorly in the same year; in over 100 years of US market data, this has happened only about five times." He added, "However, despite the interest rate hikes, the US economy, employment, and consumption were more resilient than expected. Therefore, the stock market outperformed bonds."

Regarding this year's outlook, he predicted a "normalization of diversified investment." He analyzed, "If stocks and bonds are properly diversified, bonds can provide a buffering effect even when stock market volatility is high. This year, such an investment approach will function normally."

As an investment strategy, he advised, "Invest in a diversified manner without concentrating on bonds or stocks." He pointed out, "Major elections in countries such as the US, Russia, Ukraine, and Korea are scheduled one after another. Global supply chain issues caused by US-China conflicts may resurface. The US interest rate cuts are also a variable." He concluded, "Ultimately, volatility will be very high."

Accordingly, he recommended focusing on funds with an 'asset allocation' function and managing 4 to 5 satellite funds that can respond to volatility. He especially recommended pension-centered investments.

Son said, "Retirement pensions make up a large portion of pensions. Although retirement pensions inherently have to compete continuously with investment products, last year, due to the high interest rate environment, the inflow of funds into the pension market was less than expected." However, he added, "The pre-designated management system (default option) was fully implemented from July last year, and funds have steadily flowed into asset allocation funds." He evaluated, "Since the system was introduced with difficulty, it is meaningful from the perspective of the overall market." "In the US, most mutual fund investors invest through pension accounts. The strategy is to increase pension assets through pension account investments, which are advantageous for taxes whenever possible. In an aging and low-growth phase, the government must prioritize tax management, so tax-advantaged products will gradually decrease," he also emphasized.

He particularly emphasized pension investments centered on target date funds (TDFs). TDFs invest in a diversified manner across domestic and international bonds, stocks, alternative assets, and automatically adjust asset allocation according to the retirement cycle. He said, "The core of pension investment inevitably has to be TDFs. Of course, some funds may perform better when viewed at specific points in time. However, the likelihood that the fund's performance fully translates into the investor's performance is higher with TDFs."

He also recommended a strategy of managing TDFs according to 'specific goals' rather than retirement dates. The numbers attached to each TDF product, such as 2030 or 2045, represent the target date. Son explained, "There is no need to align TDFs strictly with retirement dates. For example, if a child is expected to enter university six years from now and will need cash, one can invest in a TDF targeting 2030 through installment investments. This method is commonly used overseas, and domestic early adopters are increasingly utilizing it."