Korea’s National Pension Service (NPS) has outlined plans to set up an Asian investment office next year, potentially based in Hong Kong or Singapore.
The firm, with $455 billion in assets under management, made the announcement at its fifth fund management committee meeting headed by chairman Moon Hyungpyo, the health and welfare minister, last Friday.
The main thrust of the agenda was to set out the fund’s investment strategy and priorities for the next five years to 2019. Overall, the committee set out plans to improve its global investing approach, risk management and internal infrastructure.
It pledged to raise its proportion of overseas investment to a quarter of its total AUM by 2019, from 20% as of this June. In dollar terms that is estimated to equate to a doubling in its global investment to $180 billion out of forecast AUM of $730 billion in five years’ time.
NPS stated that its total investment into global stocks would increase from 11.3% ($45.5 billion) this year to at least 15% ($110 billion) by 2019.
At the same time, the committee said it intended to focus on risk-free and passively managed assets more – an acknowledgment it had concentrated on quantity over quality since it started its international investment programme in 2001. It said its current approach was not as systematic and institutionalised as it could be.
The change was driven by NPS’ overseas investment taskforce, set up in March 2014 to examine ways to improve its strategic approach to global markets. The taskforce had concluded NPS needed to take risk-return into account more systematically as it looks to diversify.
The committee agreed to consider introducing new financial instruments to achieve its diversification target, which could include hedge funds. In addition, it will look to establish an integrated control system for foreign exchange to better take account of risk.
For instance, it will look to determine the optimal FX hedging ratio for each capital commitment. It will also discuss ways to create a comprehensive system to manage increasing risks from its international diversification programme.
Additionally, NPS said it would launch an office next year for investing in Asian markets to share in the region's growth. It said it wanted to increase its exposure to Asia and Australia, adding that the markets it would consider for basing its office included Hong Kong and Singapore.
Moreover, it will explore ways to enhance the roles of staff in its overseas offices in London and New York to help NPS achieve its targets, including hiring fund management specialists and support staff.
NPS also plans to increase outsourcing of its domestic fixed income assets. At present it allocates 8-12% of its domestic bond exposure to private asset managers. It said it would increase that to 10-14% to better manage interest-rate volatility.
At the same time it will trim the percentage of overseas equities it outsources to private asset managers to 70-90%, from 75-95% previously. That is a reflection of the fact it plans to expand passive management of its global equity portfolio.
Finally NPS said it would change its staff incentive structure in a drive to recognise different roles and targets. It will move from a generic performance-based system to a segregated one falling into three buckets: excess-return and benchmark-based; a team-based approach (as opposed to individual compensation); and long-term, five-year performance (as opposed to annual evaluation).
NPS is hopeful this will encourage longevity of service and contribute to generating long-term returns for the pension fund as a whole. It reiterated its plans to add 65 portfolio managers in the next year, expanding its team of professionals from 161 to 226 by the end of next year.