Korea's pension funds took full advantage of buoyant stock markets to swell their assets under managment (AUM) last year, according to AsianInvestor’s latest AI300 survey. But a combination of tougher market conditions and difficulties in recruiting executives, particularly for the giant National Pension Service (NPS), is likely to dampen AUM growth this year.

Buoyant asset growth during 2017 helped ensure that Korean institutional investors claimed a larger share of the AUM pie than last year, even though there were fewer Korean asset owners in the AI300 list, which compiles the top 300 asset owners in Asia-Pacific.

There were 42 Korean asset owners featured this year, with a combined AUM of $2.4 trillion, or 6.1% of the list’s total AUM – behind only China and Japan. That compared to 43 asset owners last year, possessing $2.1 trillion in AUM, or 5.8% of the list.

While insurers comprised half of all Korean asset owners, four pension funds dominated AUM from the country. NPS, the Korea Post Savings Fund (KPSF), the Korea Teachers Credit Union (KTCU), and the Korea Teachers Pension Fund (KTPF) accounted for 28.9% of all Korean AUM, with a combined AUM of $696.8 billion.

They also reported more rapid AUM growth than the country as a whole. The pension funds reported a combined 17% growth in assets, which was the second highest among all institutional investor types in the country. Only sovereign wealth fund Korea Investment Corporation with 21% growth in AUM.

STOCK BONANZA

The impressive growth in assets came courtesy of the funds’ focus on equities and alternatives, both of which yielded some strong returns during 2017. The Korean Composite Stock Private Index, which tracks Korean stocks, rose 23.2% during the year, for example, while the MSCI ACWI index had returns of had returns of 24.62%.

This strong pension performance was exemplified by NPS. The third largest pension fund in the world, its AUM grew by 15.7% last year to $590.2 billion, which enabled it to jump four places to 13th place, in the AI300. And it did so courtesy of its investments in domestic and global equities, from which it earned 25.88% and 10.62%, respectively.

Overall, NPS reports an investment return of 7.26% for 2017, its highest annual return since 2010, which suggested that the pension fund was untroubled by the merry-go-round of top executives within the organisation. The rest of NPS’s rise in AUM came from an ongoing influx of pension savings from the workers it represents.

KTCU and KTPF similarly benefited. The former, ranked 201 in the AI300, grew its AUM by 26.2% to $23.9 billion during 2017, allocated more capital to large-cap company shares in the domestic market last year, accounting for much of its AUM growth, investment manager Kim Hyung-on told AsianInvestor.

Local stock investments were also the best-performers for KTPF. The 225-ranked asset owner enjoyed a time-weighted rate of investment return of 25.63% in 2017, CIO Park Dae-yang said. This helped it grow its AUM by 32.4%, to $17.9 billion, the second-highest AUM growth among all Korean asset owners.

TROUBLED TIMES

However, Korea’s pension funds are having to weather a much more difficult 2018.

For the first six months of 2018, both the Kospi and MSCI Asia ex-Japan had negative returns. The S&P 500 is up only 5.4% this year as well, compared to the 17.4% return in 2017, and the Korea Composite Stock Price Index is down 7.1%. All Korean funds look set to report far lower returns this year, barring a major market turnaround.

In addition, NPS is juggling this with the ongoing instability of its senior executive situation. Lee Soo-cheol was appointed acting chief investment officer in July, making him the third CIO for NPS since July 2017, when Kang Myoung-wook resigned. His replacement as acting CIO, Cho In-sik, resigned last month.

Other factors also make 2018 a more challenging year. KTPF’s Park noted that growing volatility in domestic and international markets due to monetary policy normalisation in developed markets, as well as the trade frictions between the US and other markets, make it difficult for the fund to sustain its growth rate this year.

Kim noted that KTCU should still see some growth, as US and Western European markets continue to recover and grow, but he admitted that returns will be more modest.

In light of the increased market volatility, both pension funds are aiming to allocate more of their portfolios to alternative investments. Real estate, infrastructure, and private equity should help to generate stable income and additional capital gains, said KTCU’s Kim.

For NPS, these tougher times are likely to test its ability to cope amid personnel turmoil.

An NPS spokesman told AsianInvestor that the pension fund is committed to its medium term asset allocation plan for the 2017 to 2022 period. This calls for shifting its equity allocation from around 39% to 45%, while cutting its fixed income exposure from 50% to about 45%, and keeping alternative assets at around 10%.  

The changes in the CIO position shouldn’t distract the NPS from its asset allocation plans, Chin Chin Quah, associate director at consultancy Cerulli Associates, said. “The fund has little choice. It’s portfolio is still quite skewed towards local fixed income, which are low yielding,” she told AsianInvestor.