The National Pension Service (NPS) of Korea is keeping its plan to sell its position in local stocks and increase allocation to overseas investments, despite mounting criticism from local retail investors that this recent sale of equities is causing their prices to fall.

NPS's target portfolio for 2021. (Source: NPS)

The world’s third largest pension fund had W176.69 trillion, or 21.19% of its W833.73 trillion ($735.87 billion) portfolio, invested in domestic equities at the end of 2020. It intends to reduce this to 16.8% by this year, according to its official website. 

NPS also aims to further cut this total exposure to 15% by 2025, while raising allocation to foreign stocks from 23.1% at the end of December to 30%. To meet the allocation target, the public retirement fund was a net seller of Korean equities for a record-breaking 48th consecutive trading session as of early March, selling W14 trillion in domestic stocks during the period, according to a media report.

Even after this selling spree, NPS will need to divest a further W22.6 trillion of domestic stocks this year to meet its 16.8% year-end target, assuming its total assets under management remain the same.

The pension fund’s concerted sale of local stocks has led some retail investors to lash out. They claimed it was the main culprit behind the benchmark Kospi index falling below the 3,000 mark between March 8 and March 10, amid a bearish trend for the stock market. Kospi closed 0.16% at 3,036 on Monday (March 29). 

An NPS spokeswoman declined to confirm its recent selling positions but said the pension fund’s investment direction remains the same after its top tier committee met on Friday (March 26) to review the balance of its portfolio.

“The National Pension Service has not decided about adjusting its tolerance range of strategic asset allocation (SSA) and tactical asset allocation in domestic stock assets. In other words, currently the guideline is maintained,” she said. 

NPS’s SSA policy allows the fund to hold a stock weighting at plus or minus two percentage points of the official weighting target. This means it cannot hold more than 18.8% of local stocks out of its investment portfolio under the current target.

The pension fund invested 36.5% of its assets offshore as of end December and has previously stated that it intends to increase its overseas investments to around 55% by 2025. It restructured its investment team early this year in order to invest more overseas.

NPS has appointed two heads – HJ Lim and Jung Jae-Young – to lead its newly divided global investment division and will go on a hiring spree for nearly 40 new executives, as it seeks to add to several business units and aggressively expand its offshore investments.

“MAKES SENSE”

Diego Lopez, New York-based managing director at Global SWF, said NPS should push ahead with its plan to invest more overseas to best fulfil its fiduciary duties for its pension savers.

Diego Lopez, Global SWF

However, he added that NPS, in line with many other large state-owned investors around the world, has a great influence over its local capital markets. Therefore, any transition from local assets should be phased and prudent, he told AsianInvestor.

“On the other hand, NPS’s goal should be to maximise the returns for its stakeholders – the pensioners,” he added. “If its professional managers believe that the best chance of doing so is reducing the weight in Korean stocks, so be it.”

To offer NPS’s portfolio exposure some perspective, the weight of its total domestic portfolio at the end of 2019 was 65% – far higher than Japan’s Government Pension Investment Fund’s exposure to the stocks and bonds of its local market, he noted.

“The strategic plan [of NPS] to go more global makes sense to me,” Lopez said.

The investment executive of another Korean asset owner told AsianInvestor on condition of anonymity that the country’s retail investors were sometimes short-sighted and prone to overreaction, while the chief investment officer of another institutional investor said their backlash amounted to populism.

“This kind of story will always come and go … Some retail investors are too much geared to what they are holding and what institutional investors are holding,” the investment executive said.

NPS should have its own undisclosed internal return target when it comes to managing its money. To achieve that it is looking to find alpha by buying or selling assets, and is not overly concerned about the resulting impact on the market, he added.