In a major signal of intent, Korea’s huge National Pension Service (NPS) is putting its faith in overseas stocks to boost returns, at the expense of domestic bonds.
The W500 trillion ($435 billion) billion state fund plans to raise its allocation to offshore assets to at least 35% by end-2021, from 24.3% currently. The increase will be driven by almost doubling its overseas equity exposure to 25% from 13.7% of total investments over the five-year period.
The state fund expects its assets under management to double to W1,000 trillion in that time, indicating it is due to pour an additional $200 billion into foreign stocks by 2021.
By contrast, NPS’s domestic bond exposure will fall to 40% by 2021, from 52.8% currently. However, its allocation to domestic stocks will rise to 20% from 18.6% while its local alternatives exposure will remain around 4.3%.
NPS set out its intentions as part of its latest five-year plan this week. The 2017-2021 investment plan aims to address limited returns from domestic assets through portfolio diversification, mainly into foreign exposure.
The fund management committee is targeting an annual return of 5.0% during the five-year period, an increase over the annualised 4.7% it achieved between 2011 and 2015.
Domestic stocks posted an annual loss of -0.46% from 2011 to 2015, while overseas equities yielded 7.55% annualised over that period.
Following the lacklustre performance of local stocks last year, NPS in March replaced head of domestic equity investment Han Jung-Su, as reported. This came after the recent appointment of a new chief executive, Moon Hyung-Pyo, on December 31 and chief investment officer, Kang Myoun-Wook, in February this year.
The fund forecasts an AUM of W608.5 trillion by the end of 2017, with W117.1 trillion in domestic stocks, W93.6 trillion in overseas equities, W301.1 trillion in domestic bonds, W24.3 trillion for overseas bonds and W72.4 trillion in alternatives.
Other large institutional investors in the region are also moving to increase their offshore exposure, but not all are putting such a big focus on equities. For instance, the biggest Taiwanese insurers – Cathay Life, Fubon Life and Shin Kong Life – are increasing their foreign bond allocations above all.