Korea's National Pension Service (NPS) plans to diversify its portfolio by increasing equity and alternative investments, while reducing fixed-income investments over the next five years.

The Ministry of Health and Wealth of the Korean government held the third annual NPS management committee meeting last week and announced its next five-year investment plan, for 2012 to 2016.

The ministry has announced its five-year investment plan every year since 2006.

The NPS committee announced that the annual target return for the next five-year period is set at 6.5% based upon Korean CPI growth rates and economic growth forecasts during the period.

In order to achieve that, it recommended the NPS’s optimal investment portfolio be composed of equity (more than 30%), fixed-income assets (less than 60%) and alternative investments (more than 10%).

About this time last year, it was set at 23% in equity investments, 71% in fixed-income assets, and 5.8% in alternative investments.

This means that future equity investments will be expanded from the current 23% to 30%, and this will require an additional $95 billion in new equity (both domestic and global) investments over the next five years.

In order to keep returns stable, as well as to generate alpha, it also suggested that NPS will continuously increase its global allocations and alternative investments.

The NPS estimates that its AUM will reach about $540 billion (assuming USD/W1,050) by the end of 2016. This means its domestic equity investment proportion will increase from 17% (planned last year this time) of its total AUM to more than 20%. Similarly, global equity investments will grow from 6.2% to more than 10% of AUM.

So by the end of 2016, the total global equity investments of NPS will exceed $54 billion. This clearly shows that the NPS will boost its global equity assets at a much higher rate than local stocks.

The NPS investment committee also said that the detailed 2016 target portfolio structure will not be publicised as this may have an adverse impact on its performance.