Korea’s Government Employees Pension Service (GEPS) is making significant changes to its asset allocation and adopting a longer-term investment horizon, in a bid to improve returns, AsianInvestor has learned.
The W6 trillion ($5.2 billion) state fund plans to increase its alternatives allocation from 16% now to 20% by the end of 2016 and nearly double its foreign asset exposure to 30% from 16% by 2020, with a view to boosting returns. It is also shifting money from domestic active equity funds into domestic passive investments, but increasing its use of active managers to obtain foreign exposure.
Last year its investment portfolio comprised 49% bonds, 35% stocks and 16% alternative assets and is targeting an ratio of 5:3:2 for those asset classes on a medium- to long-term horizon. That indicates that the alternatives increase will come at the expense of the equity allocation, in a move similar to that taken by the $22.5 billion Korean Teachers’ Credit Union, as reported.
Meanwhile, GEPS plans to reduce its domestic active equity investments and in favour of domestic exchange-traded and equity index funds.
On the alternatives side, the institution is considering investing in non-traditional assets such as real estate. GEPS' chief investment officer, Choi Young-Gwon, told AsianInvestor that GEPS had just closed an Australian property deal and may consider real estate transactions in Europe in the near term. It is also considering allocating to domestic and foreign private equity funds in the near future.
Choi also plans to adopt a new, longer-term investment approach.
“Korean institutional investors have had a tendency to evaluate the investment performance of local asset management companies over short-term intervals – say three to six months," he noted. "Such practices drive asset managers to obsessively pursue short-term returns."
Choi said GEPS would devise a system of evaluating and analysing investment performance over longer-term intervals, of at least two years.
He added that global asset managers tended to apply different investment principles for different funds, whereas their Korean peers tended to use similar approaches across funds and focus on short-term results. Choi said GEPS would take the lead in creating a long-term investment climate by training internal portfolio managers and analysts.
The institution has generally used exchange-traded funds to obtain foreign exposure, but is increasingly working with foreign active managers to secure more diversified sources of excess returns.
GEPS made its first investments in global equity and fixed-income funds run by overseas firms last year, and Choi expects the portfolio’s risk-return profile to improve as a result. He believes that taking more active stance on style and regional diversification of foreign assets will have a positive impact.
Despite the difficult macro environment amid the global economic slowdown and low interest rates, GEPS last year a return of 3.93% and is targeting 4.6% this year.