The National Pension Service (NPS) of Korea is likely to bring more of its offshore fixed income and equity investing inhouse while scaling up overseas alternative asset partnerships, as part of an ambitious plan to more than double its foreign investments to W550 trillion ($460.3 billion) by 2025.
On Friday (July 31), the pension fund revealed at its annual committee meeting that it would seek to invest 55% of its assets into overseas assets by 2025, up from an existing target of 50% by 2024. Given that the world's third-largest pension fund expects to have assets under management (AUM) of W1 quadrillion by 2024, that would mean it has to invest at least W550 trillion overseas, possibly more.
It's a big move from its offshore allocation of W270.4 trillion, or 36.1% of its W749.3 trillion AUM, as of end-May.
As part of this effort, health minister Park Noong-hoo told the media that NPS would ramp up its investment staff. It would add 200 members to the 149 it has today by 2024, which marks a huge increase in its capabilities as part of a move to cut management fees.
An NPS spokesman responded to a set of emailed questions from AsianInvestor over the investment plans by stating that "the [investment] policy decision is made by the Fund Management Committee (the highest decision-making body)," and that the results of the committee's meeting on July 31 were expected to be released before August 14.
However, minister Park had mentioned that NPS would target more high yield and emerging market bonds. And an investment adviser who is close to NPS told AsianInvestor that the pension fund would need to increase overseas assets across its portfolio to raise them in such scale.
A senior investment executive at another Korean asset owner that often invests offshore told AsianInvestor he believed an organisation of NPS's size would most likely initially direct its efforts on scaling up its in-house personnel to focus on public fixed income and equities.
"The traditional assets classes would be the target areas to internalise as much as they can; as time goes by, we know that they don't provide as much alpha as they used to, so they might be giving up generating alpha from these classes and go with targeting beta in fixed income securities and public equities."
That might entail more passive- or smart beta-style investments, which would lower cost and would not require a huge amount of bottom-up style market expertise.
"Internalisation means making more direct investments, so they would probably look to invest in equities and fixed income," agreed the investment adviser.
NPS's ability to attract the necessary staff could be boosted by government plans to de-centralise the economy from Seoul. This is an important move; NPS had seen an exodus of staff in 2017 when it moved its headquarters to Jeonju, around three hours' travel from the current capital.
However, the ruling Democratic Party of Korea is also planning to move Korea Investment Corporation, its sovereign wealth fund, to Jeonju along with Korea Venture Investment Corporation and Specific Post Office Pension Service Agency. The government also intends to move the national assembly and the president's residence to Sejong, a newly built city in the middle of Korea that is far closer to Jeonju. The government's eventual aim is to make Sejong the new capital of Korea.
Those plans would make Jeonju feel far less provincial, and likely make it easier to attract the personnel NPS will need.
OFFSHORE OFFICE EXPANSION
As it builds its local staff to cover equity and fixed income, NPS will likely continue to develop offshore partnerships and external managers in alternative asset areas as it seeks to source more alpha in those investments.
The pension fund has offshore operations in London and Singapore since 2012 and 2015, respectively, and has been looking to give them more decision-making powers.
"As time goes by, I think they will try to hire more headcount in their overseas offices and provide them with more discretion in final decision-making," said the senior investment executive.
The offices will prove particularly crucial for sourcing alternative assets. Alternative assets currently comprise 12.2% of its portfolio as of May, but NPS chief investment officer Ahn Hyo-joon told an AsianInvestor's 13th Korea Institutional Investment Forum in April 2019 that the pension fund wanted to raise this to 15% by 2023. It restructured its alternatives team early this year to help achieve this goal.
"NPS's portfolio managers in overseas offices are building relationships with local GPs (general partners) and their managers and are leveraging those kinds of opportunities," said the investment adviser.
She added that the sheer scale of NPS's ambitions meant that it was looking to offer a set of mandates, not only for external investments but also for advisory work and partnerships. Investment consultants such as Willis Towers Watson and Mercer have already met with the Korean pension fund, and they and other rivals may well be tapped to help it expand its offshore plans. This is particularly likely given the physical difficulties of meeting foreign fund managers, amid Covid-19-related travel restrictions.
In addition, NPS has longer-term aspirations to become a more prominent global player.
"When I talked to NPS, it was clear they think they should be one of the leaders in global market investments, and they want to know their peer groups better and would like to meet them at the same level," said the investment adviser.
"They are also increasingly happy to share what they have seen and developed together with second and third-tier pension funds and asset owners."
One important question for NPS as it embarks on this bold reimagining of its investment approach will be who would guide the changes.
CIO Ahn was appointed in October 2018, but his contract expires on October 8, and there is no certainty whether he will be reappointed. Complicating this issue is the fact that NPS currently has no chief executive, who would typically make such a decision. There has been talk that Kim Yong-jin would take the role, but to date, his appointment has not been confirmed.
The investment adviser argued that it makes sense for the government to extend Ahn's term, given that NPS had lacked consistent senior management and suffered scandals before he was appointed.
"I think he's done a great job," she said. "After he re-joined NPS, the organisation has become more stable, and people feel more secure, whereas before, we had several scandals with previous CIOs.
"Ahn knows the market and has experience in investment, and, as well as working for NPS before, he has worked for global firms in many countries. I think he is a very good fit for the role, especially if the next period will see the firm become more global."
The CIO was less effusive in his praise but agreed that it made sense to keep Ahn in the position, provided he is willing.
"He has done okay; I'd say NPS was previously in a comparatively more unstable situation, but it has stabilised now and also performance-wise it looks okay. I think he deserves a longer-term, particularly because NPS needs to have extended tenures for high level investment professionals. The level of churn it has undergone has made it hard to keep a consistent strategic focus."
He argued that Ahn, or whoever replaces him, has one particular focus: raising the alternative assets exposure.
"From a strategic asset allocation perspective, NPS's alternative investment proportion is too low, and they miss the target level every year. Alternative investments require a long time to construct, so the sooner they focus on it, the better. They need to take advantage of their size."