Korean pension funds are far ahead of their Asian peers in alternative investments, with $101 billion invested in private markets as of 2020, accounting for 11% in their portfolios on average, up 0.9% compared to 2019, according to a new Mercer report.

Asian pension funds’ allocations to alternative assets have demonstrated a modest increase of 0.6% from 2019 to 2020 – with Korea still the most active country at 11% of assets invested in the private market, wrote the report, released on Monday (September 6).

Japanese pension funds’ $38 billion in private assets came in the second place, boosted by allocations by the $1.74 trillion giant Government Pension Investment Fund (GPIF). However, allocations dropped from 2.6% to 0.7% between 2019 and 2020.

Source: Mercer (Click for full view)

Asian pension funds (excluding Japan) altogether registered a 0.6% rise in alternative positions from 2019 to 2020, accounting for 7.7% of the portfolio.

The report covers major pension funds in Asia excluding Australia and New Zealand, with limited data and information from China and Singapore. Most updated data in the report was as of September 2020. 

Comparison between current (2020), prior (2019) and inaugural (2013) allocations 
Source: Mercer (Click for full view)

LEADING THE WAY

Korean pension funds allocated 11% to private assets on average – the highest proportion among the group, and marking a significant increase from 0.9% in 2019.


Korean pension funds asset allocation
Source: Mercer (Click for full view)

Both the world’s third-largest pension fund, the $780 billion National Pension Service, as well as Teachers’ Pension, have ambitious plans to raise allocations to alternative assets. NPS has set the target of having 15% in alternative assets by 2025, while Teachers’ Pension wants to reach 30% by the same year.

Korean pension funds have been investing more in real estate and infrastructure debt, said Janet Li, Mercer’s Asia wealth business leader.

Noting that Korean pension funds have been actively investing in real estate at home and abroad, Li observed that their focus is on data centres, logistics, and renewable energy-related investments with ESG considerations.

In 2019, the Korean government removed the cap limit for pension funds to invest in risky assets, which led to asset owners taking more risks within the portfolio, she added.

NEED FOR TALENT

The long-term shift towards alternative assets has been somewhat disrupted during the pandemic. Moreover, Asia remains less sophisticated in portfolio diversification and alternative investments compared to its European counterparts, whose pension funds boast 20%-plus positions in alternative assets.

For instance, Hong Kong pension schemes still have 60% positions in equities – with nearly no exposure to alternative assets due to regulatory restrictions. In India, over 90% of assets are in fixed income, with just 8% in equities. Indonesian allocations are similarly conservative.

Source: Mercer (Click for full view)

Talent is one of the key challenges, and a high priority for Asian investors going into alternative investments, Li noted. “In order to identify the investment opportunities and be able to connect with the GPs (general partners) for investment openings, you need the right talent.”

“This is one of the higher hurdles of asset owners in Asia right now, because we in general might not have as many professionals in the alternative space compared to our European counterparts – for simple reasons that they have been on this journey longer than us,” Li said.

“But definitely, Asia’s growth in this area will be huge in the coming years.”

STRONG BONDS

From 2019 to 2020, the report also found that fixed income allocations for Asia ex-Japan pension funds had registered the biggest increase among other asset classes, rising from 52.8% to 55.4%. Domestic bonds were slightly more attractive than foreign ones, given a strong home bias.

Indonesian pension funds led the way, with a near-30% increase in bond allocation from 51.9% to 69.9%.

“We believe this can be attributed to the cautious behaviors from investors in anticipation of the economic downturn in the pandemic environment,” the report said.

On the other hand, equity allocations only went up slightly by 0.1% to 31.9% among Asia ex-Japan pension funds.

Japanese pension funds asset allocation
Source: Mercer (Click for full view)

The trend was similar in Japan, with bond allocations rising by 4.2% to 46.7%. The surge was notably driven by foreign investments, as the country’s $1.74 trillion Government Pension Investment Fund (GPIF) moved 10% of its assets from Japanese bonds to foreign bonds in early 2020.

This story has been edited to lead with Korean pension funds' alternative investments.