Korea’s NPS sets targets after winning QFII permit

The $300 billion pension fund is hopeful it will receive a quota by the second half of this year to begin investing in mainland Chinese securities and is busy preparing internally.
Korea’s NPS sets targets after winning QFII permit

Korea’s National Pension System says it expects to know within three months how much it can invest in Chinese securities after receiving a qualified foreign institutional investor (QFII) licence.

The largest of Korea’s pensions funds revealed at the weekend it had been granted permission by the China Securities Regulatory Commission (CSRC) to buy stocks and bonds on the mainland. It must now await a quota from the State Administration of Foreign Exchange (Safe).

An NPS insider tells AsianInvestor it expects it will take three months to know the amount it is allowed to invest, but is hopeful it will be able to allocate by the second half of this year.

He adds that the fund is busy setting up its own investment structure internally in preparation. “We don’t have any strategies yet, but there will be more weight on Chinese stocks than bonds,” he suggests.

The quota that NPS is awarded will likely range from $100 million to $300 million. On March 18 last year, for example, the Hong Kong Monetary Authority was granted $300 million by Safe.

Meanwhile sovereign wealth fund Korea Investment Corporation (KIC) is also awaiting the outcome of its QFII application, as is Bank of Korea, which recently told AsianInvestor it was hoping for $300 million.

A QFII licence approval represents a landmark for NPS in its drive to diversify internationally. The fund saw its AUM surge 29% in the year to March 2011 to just under $300 billion, putting it in 12th spot on AsianInvestor’s annual list of the top 200 institutional investors in Asia ex-Japan.

“It’s good news and way overdue,” says a CIO at one Korean asset management firm. “The Chinese authorities want long-term investors and NPS will be aware of this. It will probably target equities more than bonds via beta exposure and it will benefit NPS in terms of its global diversification, potentially enhancing long-term performance.”

Korea’s NPS has publicly committed to diversify its portfolio by increasing equity and alternative investments while reducing fixed income over the next five years.

In its five-year investment plan, announced in the middle of last year, NPS set its annual return target at 6.5%, with an optimal portfolio composed of equity (30%), fixed income (less than 60%) and alternatives (more than 10%).

NPS aims to increase its overseas equity exposure from 6.2% in 2010 to more than 10% by the end of 2015. It is also setting out to raise domestic equity from 17% to 20%, and alternatives exposure from 4.1% to over 10%, while reducing domestic fixed income from 66.8% to under 60%, and keeping domestic fixed income under 10%.

NPS has already estimated its AUM will reach $540 billion by the end of 2016, meaning its total global equity investments will exceed $54 billion.

AsianInvestor named NPS as institutional investor of the year in our magazine’s inaugural Korea awards last year, with the write-ups appearing in our April edition. As an example of its pioneering nature, NPS appointed BlackRock, Credit Suisse and Nomura last year to what is believed to be its first formal panel of transition managers.

NPS is one of four Korean public pension entities, along with the Government Employees Pension Service, Korean Teachers Pension Fund and the Military Mutual Aid Association.

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