Korea's KIC to diversify asset portfolio

LONDON, March 13 (Reuters) - Korea Investment Corp (KIC), South Korea's sovereign wealth fund, is to put a third of its assets this year into alternative assets such as hedge funds, private equities and real estate to diversify its portfolio.

KIC, which was set up in 2005, has invested in only bonds and equities, with 60 percent of the $20 billion worth fund in fixed-income. But as the size of the sovereign wealth fund grows, it is its eyeing alternative assets.

"We like to diversify our portfolios to lower the overall risk," Jaeuk Khil, member of steering committee of KIC told Reuters at the sideline of a sovereign wealth management conference in London on Thursday.

KIC, which invested $2 billion in Wall Street bank Merrill Lynch (MER.N: Quote, Profile, Research) earlier this year, is likely to outsource the $10 billion new money the Ministry of Finance injected into it this year to third party managers, he added.

Korea government plans to increase the asset size of KIC to $50 billion by 2010.

Fuelled by dramatic growth in emerging-world current-account surpluses, sovereign wealth funds are expected to reach $15 trillion within five years from the current level of $3 trillion, according to HSBC.

With low government bond yields and a weak U.S. dollar, sovereign wealth funds' risk appetite are on the rise.

UBS sovereign client services managing director Terry Keeley said while only 2 percent of central bank assets were approved for equities in 2003, that ratio increased to 22 percent in 2007.

UBS estimates that only 5 percent of all sovereign assets are put in alternative investment and 20 percent in equities. Keeley said sovereign investors should move to riskier assets to boost returns. (Reporting by Daisy Ku; Editing by Mike Elliott)