Scott Kalb, former chief investment officer of Korea’s $45 billion-plus sovereign wealth fund, Korea Investment Corp., knows how to take smart risks. Hired by KIC in 2009, Kalb, 56, reorganized the investment team and stabilized KIC’s loss-making investment portfolio — which was then worth just $19 billion — by recalibrating its approach to risk management, diversifying its holdings and implementing a long-term investment culture and discipline. The results have been dramatic. Over the three years of his tenure, through March 2012, KIC’s portfolio has delivered annualized returns of 12 percent. Although Kalb’s term as CIO came to an end on March 31, he remains an adviser to KIC through June 30 and continues to work closely with his successor, Dong-ik Lee, who previously ran KIC’s private markets group. In April Kalb spoke with Institutional Investor London Bureau Chief Loch Adamson about global investment risks and the opportunities he sees for KIC.

What changes did you make to KIC’s strategic asset allocation model when you arrived?

Kalb: We reorganized our strategic asset allocation model around risk. Broadly speaking, we divided assets into three categories, or risk buckets, and each category has three sectors. The first category is growth, and we put public equity, private equity and credit into that risk bucket, since each of those ought to be growth drivers, depending on the economic environment. The second category is stable value, which we think of as providing a stable source of income, rather than an opportunity to shoot for returns — and it also helps lower the volatility of our portfolio by delivering good diversification in the event of any craziness in the equity markets. We allocate government bonds, hedge funds and cash to that bucket. The third category is for real-return assets, and that is where we put commodities, inflation-protected bonds and real estate.

Where do KIC’s strategic direct investments reside?

The strategic investment portfolio is separate, because it’s not part of the asset allocation model. It’s opportunistic. With all of those other strategies, you can make an asset allocation plan and then work to implement it. Strategic investing depends on what’s out there in the markets — and the returns are always going to be lumpy, which can distort your asset allocation model, so it’s better to keep this strategy separate.