As interest rate uncertainties and inflation fears weigh on global markets, at least two pension funds in the Asia Pacific are hedging against uncertainty with diversified portfolios, placing even more money on overseas assets.

Sharing their views at AsianInvestor’s Asian Investment Summit last week, the Social Security System (SSS) of the Philippines said it plans to add to its allocation of foreign investments to bring it to 7.5% of its portfolio in the short term.

Similarly, the Korea Teachers’ Pension says it will stick to its long-term plan of increasing overseas assets and alternatives.

SSS is a national social insurance programme in the Philippines for those working at home and abroad. As the country’s largest pension fund, it manages $20 billion in assets. The fund was granted a new charter in 2019 to relax restrictions on overseas investment, among other things.  

Rizaldy Capulong,
Social Security System

“For the SSS, I think our charter change has paved the way for us to be able to cope with uncertainties of inflation and interest rates moving forward. In particular, we are allowed to improve through diversification,” Rizaldy Capulong, SSS’s executive vice president and head of investments sector, told the panel discussion.

Since the changes, the fund’s investment in loans has been increased from 10% to 25%, while properties were raised from 5% to 15%. Capulong told AsianInvestor the fund is now prepared to take foreign investments up to 7.5%.

He didn’t specify preferred asset types.

 The fund also has the ambition to raise annual returns from 6% in 2018 to a sustainable 9% each year. To achieve the five-year plan, the fund started outsourcing investment, and has been shifting from fixed income, such as government securities and corporate bonds to others. This has included increasing foreign investments from zero to 7.5%, as well as more focus on properties, equities, and loans.

Though the plan was disrupted by the pandemic, and SSS had to become a net seller of fixed income securities and equities in 2020 to maintain cash flow, Capulong believes the diversification strategy will help them get through this difficult period.

US inflation rose to 4.2% in April, the highest rate since 2008, leading to a sell-off in equities as the S&P 500 and Nasdaq fell 2.2% and 2.7%, respectively a week after US consumer price data was released. 

LONG-TERM INVESTMENT

Similarly, the $21 billion Korea Teachers’ Pension plans to combat inflation and the threat of rising interest rates through a diversified portfolio.

Under a long-term strategic asset allocation (SAA) plan, the pension fund for private school teachers is set to reduce domestic and fixed income assets, and will add position to alternative and overseas assets.

Its plan is to increase foreign alternative assets from 10% to 25% by 2025.

Lee Kyu-hong,
Teachers' Pension

In terms of sectors, chief investment officer Lee Kyu-hong said the fund prefers new era-related investments, such as e-commerce, information technology platform, and healthcare.

It also favours distressed sectors like traditional manufacturing and hospitality. So far, a third of the W3 trillion ($2.7 billion) committed to foreign alternative assets has gone to infrastructure assets.

However, Lee told AsianInvestor that the plan was disrupted and fell behind schedule with the biggest challenge coming from conducting due diligence on offshore alternative asset classes.

While Teachers’ Pension has profited from the strong equity market in 2020, Lee said that it, in turn, hindered the fund from diversifying the portfolio.

He said the Teachers’ Pension would stick to its long-term plan of portfolio diversification, avoiding short-term market-timing decisions that stem from rising inflation or interest rate.

“As I repeatedly said, we are a long-term investor with disciplined SAA philosophy. A disciplined investment process that builds up a well-diversified portfolio is one of the best ways to cope with this unpredictable investment environment. We will stick to our philosophy,” Lee told AsianInvestor.

The Asian Investment Summit was held from May 31 to June 4, featuring asset owners as they discuss their investment strategies for 2021 and beyond. Click here find out more.