Korea’s NPS sets aggressive new asset allocation

Korea’s National Pension Service (NPS) is moving to increase exposure to domestic and international equities and alternatives after conceding it maintained allocations to fixed income for too long. This raises potential outsourcing opportunities for local and global asset managers.

The $360 billion fund, established in 1988 to pay pension benefits, plans to increase domestic equity exposure to 20% of assets by the end of 2014, from 18.7% as at the end of 2012. Over the same period it will raise global equity investments to 10.5%, from 8%, and alternative investments to 11.3%, from 8.4%.

It will fund this by reducing its domestic fixed income investments sharply, from 60.2% to 54.2%, and its global bond exposure from 4.7% to 4%.

It is adopting this proactive approach after the Ministry of Health and Welfare revealed last Friday that NPS’s annual return for 2012 was 6.99%, below international peers including ABP of the Netherlands (13.7%), GPF of Norway (13.4%), Calpers of the US (13.3%), CPPIB of Canada (10%) and GPIF of Japan (8.7%).

The ministry concluded that the reasons for NPS’s disappointing performance was that it had maintained its fixed-income allocations too long both domestically and globally, while other global pension funds had raised their investments to global equities last year.

Korea is confronted by low economic growth and an aging population, and as such NPS is required to take a more aggressive investment approach to improve returns.

The ministry also set NPS’s total AUM target at just under $430 billion by the end of 2014, which would be a 23% increase on its $348.4 billion in assets as at the end of last year.

Of this, it aims to have equity allocations of $130 billion ($85 billion for domestic stocks, $45 billion for overseas); fixed income allocations of $249 billion ($232 billion for domestic, and $17 billion for overseas); and $48 billion in alternative investments.

The ministry indicated that NPS’s net new investments will be $67.8 billion over the period. Breaking it down, in 2013 it will invest $18 billion in domestic stocks and bonds, $6.6 billion in overseas stocks and bonds, and $11.2 billion in alternative investments (both locally and overseas). In 2014, it will invest $18.7 billion in domestic stocks and bonds, $8 billion in overseas stocks and bonds, and $5.3 billion in alternative investments.

Regarding 2012 performance, the ministry noted that NPS’s 6.99% return was 0.3 percentage points above its average annual return of 6.69% since 1988.

NPS’s average annual return over the past three years is 6.6%, lower than all of its peer group bar Japan’s GPIF (2.2%). However, the ministry also points out that NPS’s average annual return for the past five years is 6%, which is highest among its peer group.

By asset class, NPS’s average returns from domestic equities in 2012 were 10.21%, 5.84% from domestic bonds and 4.85% from alternative investments – which were all below target benchmark figures.

But returns from overseas investments beat its benchmarks, with 10.43% from overseas equity and 9.59% from overseas fixed income, respectively.

Only last month, the ministry announced that it had appointed former health and welfare minister Choi Kwang as the new chairman and chief executive of NPS, as reported.

The position became available after Jun Kwang-woo resigned in February and departed on April 18, in line with a reshuffle of top posts as the administration of new president Park Geun-hye took office on February 25.