Korea’s National Pension Service (NPS) is set to significantly raise its exposure to overseas markets, most notably equities, in an effort to keep pace with its five-year average annual return target of 5.3%.

According to its chief investment officer, Ahn Hyo-joon, the fund plans to increase overseas exposure to up to 45% of its W565.5 trillion (about $500 billion) under management within five years, up from 30% today. This would mean a $75 billion larger allocation today; it will mean even more when the asset pool has grown further.

To hit that target NPS will need to boost non-domestic investments by about W40 trillion every year, eventually reaching an overseas exposure of about W400 trillion by the end of 2023.

Ahn presented the fund’s bold plans at AsianInvestor’s 13th Institutional Investment Forum Korea, held last week in Seoul. He said the fund would bolster returns by adding alternative assets and rebalancing its global equities and fixed income risk/return profile.

TOUGH TRADING

Ahn’s comments come on the back of a difficult year for the pension fund. The world’s third largest pension fund suffered a notable setback in performance in 2018, registering a negative 0.92% return on average. The fund is also acutely aware of its significant exposure to Korea’s domestic markets overall, where it effectively owns 18% of all equities on the Korean Stock Exchange.

NPS has just over one-third of its entire portfolio invested across domestic and international equities – domestic equities delivered it a negative return of 16.77%, while overseas equities made a loss of 6.19% – as reported by AsianInvestor in March.

“Against this backdrop, we think the investment diversification is critical for NPS as a long-term investor to achieve the goal of profitability and stability at the same time,” said Ahn, who was appointed as CIO in October 2018 for a two-year term.

Last year NPS’s fund management committee set a target return of 5.3% over the following five years. Since its inception in 1988 up to January 2019, it has posted an annualised return of 5.01%.

With 2018 proving difficult, it’s not surprising that NPS will ramp up risk profiles and venture into new products.
NPS's headquarters

To achieve its new target, NPS is aiming for an end-2023 allocation of around 45% in equities, 40% in fixed income and 15% in alternative investments.

The biggest growth will come in overseas equities, for which the allocation target is 25% (the share was 15.4% as of end-2016) and in alternatives, which are set to rise to 15% of AUM from 11.4% as of end-2016. The rebalancing is coming at the expense of fixed income assets, which are slated to fall heavily (from 55% at end-2016 to around 40% as of 2023).

The process is well under way. By the end of this year, NPS intends to allocate 18% of AUM to domestic equities, 20% to global equities, 45.3% to domestic fixed income, 4% to global fixed income and 12.7% for alternatives. 

Ahn said at last week’s forum that NPS would look to adjust each allocation, where profitable, and consider various new entries to diversify portfolios by region. He indicated an increase in exposure to emerging markets could come into play, albeit only following “rigorous research”.

“For global fixed income, we will consider creating new asset classes such as highly liquid developed-market treasury bonds as a highly liquid asset class. We will also expand our portfolio towards lucrative assets such as high-yield corporate bonds,” Ahn said.

ALTERNATIVES AUTONOMY

NPS’ alternatives team – which posted 11.8% returns last year – will be given increased investment autonomy going forward. Each of the three alternative asset types – private equity, real estate and infrastructure – was previously covered by a domestic and an overseas team. From 2019, they have been merged into one unit in a bid to create greater internal collaboration and prevent teams building relationships with the same investment professionals and external managers.

NPS will also strengthen the investment capabilities of its overseas offices in London, New York and Singapore, Ahn said. “We will continuously seek for new investment opportunities expected to deliver high long-term returns in the real estate and infrastructure sectors.”

NPS’ overseas investment teams have not been shy of dealmaking. In August 2018, the pension fund bought Goldman Sachs' European headquarters, Plumtree Court in London, in a sale-and-lease-back deal. The bank will be a tenant on a 25-year lease on the building with a break option after 20 years. The price was £1.16 billion ($1.52 billion), making it the third-largest single-asset transaction ever in the UK, according to property data provider Real Capital Analytics.

NPS’s plan chimes with ambitions of other large asset owners both within and outside Asia to increase both foreign and alternative investment exposure. Recent exponents of this trend include Malaysia’s Employees Provident Fund; the Teacher Retirement System of Texas; and various Canadian pension managers such as CPPIB, Ontario Teachers' Pension Plan and PSP Investments.