The $77 billion National Pension Corporation of South Korea is likely to outsource $2 billion to international fixed-income fund managers later this year, according to sources close to the organization.

This would mark its second foray overseas. At the beginning of the year it mandated a total of W500 billion ($400 million) for international equities to Capital International, Fidelity Investments, State Street Global Advisors and Wellington International Management.

NPC's new CIO, KJ Cho, joined in November and is said to prefer diversifying into international bonds rather than face the uncertainties of the global equities market. "Why go for high risk when you can get a decent fixed-income return?" says a source. NPC, he adds, can probably get 3% to 4% annually from international bonds just off the interest rate differential and hedging back into won.

Moreover, the NPC is said to be not looking at a generic international portfolio of G3 sovereign debt. It is probably too late to take advantage of the bull runs that US Treasuries and Japanese Government Bonds have enjoyed over the past few years. Rather, the NPC may seek to hire specialists in European corporate bonds, emerging market debt, and even US mortgage-backed bonds - all segments that may produce double-digit returns.

Although the NPC is expected to do this sometime in 2003, it will probably take a while. First, there is an ongoing reshuffling of mid-level executives and the firm's global bond specialist who was meant to oversee outsourcing has left. Cho will need time to put together an internal structure before he can start looking at managers.

Second, the NPC will need to decide whether it uses an outside consultant, or approaches managers itself. It used Watson Wyatt to select its equities managers. A consultant provides political cover as well as expertise; on the other hand, the NPC is loathe to pay fees, because this leaves it open to charges of 'wasting the people's money' - which may seem ridiculous to global firms, but can be a serious political weapon in Korean politics.

Third, no one knows whether the NPC will consider hiring a currency overlay manager to hedge its offshore bond exposure.

Fourth, it has yet to implement the existing equities mandates. The NPC has yet to finalize terms with the four equities managers. SSGA is said to be leading these negotiations, as its mandate is passive, which is seen as easier to work out. Executives at the active managers acknowledge the NPC is probably wise to wait until the situation in Iraq clears. But they also grumble the NPC is trying to tag on additional services such as training and technology transfer that were not part of the original deal.

Nonetheless, everyone is confident that the equities tranches will be disbursed this year. It now seems a much larger fixed-income flow is likely to follow.