National Pension Fund (NPS) has outlined plans for a bolder and broader approach to investing in alternatives, and not a moment too soon after the Korean behemoth posted a negative overall return last year.

By allowing greater operational autonomy the world’s third-largest pension fund hopes to streamline some of its decision-making processes to help bump up its allocations to alternatives and get its five-year return target back on track. 

“NPS has missed on opportunities in the alternative and real asset sectors due to their complex and lengthy approval process,” the Asia Pacific head of a US-based asset manager familiar with NPS’s investment strategy told AsianInvestor on condition of anonymity. 

And that has dragged on NPS’s returns in recent years because its allocation to alternatives – its best performing asset class in 2018 – has been too low, he said.

The pension fund's allocation to alternatives helped to offset what was otherwise a bad year for investing in 2018, and meant it performed better than peer Government Pension Investment Fund of Japan, which has a miniscule alternatives allocation. But compared with other global pension funds, NPS's relatively underweight asset allocation to alternatives could be questioned for being too conservative, the Asia Pacific asset management head added.

But in a move announced by Korea’s Ministry of Health and Welfare last week, the aim at NPS now is to cut down the time it takes to execute alternative investments to as little as four weeks from the current fastest time of around eight weeks.

With W565.5 trillion ($499 billion) under management as of end-2018, NPS is now also set to broaden out its alternatives investment remit to include private debt and hedge funds – not just multi-asset funds but single hedge funds too.

In this way, NPS might be able to reduce its fee costs and increase its control of hedge fund investments with a relatively more direct strategy.

Under the new framework, NPS will be better placed to make co-investments or relatively small investments below $50 million without having to seek prior approval from the highest decision-making body, the Ministry of Health and Welfare said.

According to several sources familiar with NPS’s investment strategy, the pension fund is keen to explore joint ventures with aligned asset owners around the world. And to help achieve these partnerships, NPS is seeking to increase the size of single alternative investments so it can more easily commit to big ticket investments with its partners. 

CATCHING UP TO A POOR 2018

In 2018, losses on equities especially resulted in an overall negative return of 0.92% for NPS. The fund has just more than one third of its entire portfolio invested in both domestic and international equities – domestic equities delivered a negative return of 16.77%, while overseas equity made a loss of 6.19%.

Ahn Hyo-joon
 

At the other end of the scale, NPS’s alternatives team posted an 11.8% return.

But in April, Ahn Hyo-joon, NPS's chief investment officer, hinted at a change of direction due to the volatility of equity markets.

“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,” Ahn said in a keynote speech.

In 2018, NPS’s fund management committee set a target return of 5.3% over the following five years. So it’s not surprising, after a difficult 2018, that NPS is now looking to ramp up risk profiles and venture into new products. The return rate of 2019 stood at 3.9% as of February.

According to official documents on NPS’s website, the ambition is to grow the target allocation to alternatives from the 2018 share of 12% to 12.7% in 2019 and to around 15% by 2023.

Based on its total AUM in 2018 into account, the additional three percentage points would equate to $15 billion in additional investments.