South Korea's $78 billion National Pension Corporation is conducting its second search for an investment consultant to help it with its next rounds of international mandates, according to fund managers.

Watson Wyatt was hired in 2002 to provide all-round expertise in getting the NPC to make its inaugural overseas investment, and helped it select four managers for a W500 billion ($430 million) tranche of active and passive global equities mandates benchmarked against the MSCI World Index.

That job was finished last year, and now the NPC is preparing to return to the markets in 2004. Its outsourcing team, headed by CIO KJ Cho, has not finalized what kind of asset classes it will seek. According to fund managers, the NPC was looking to do invest more in international equities, perhaps with a different style or sector allocation. But people close to the NPC say that its bullishness on equities has recently been tempered, and it is uncertain how well a three-year mandate will perform, particularly in the wake of the US Presidential election scheduled for November.

But the NPC does appear determined to make its first foray into global fixed income, and the consultant search reportedly will concentrate on the puzzle of how to invest now in global bonds when interest rates are expected to rise. One fund manager says the NPC is looking at investing $2.5 billion in global fixed income, although it will probably manage part of that itself. The consultant will presumably be asked to recommend how much of that figure should be outsourced.

The NPC is reviewing the obvious three investment consultants in Asia - Watson Wyatt, Mercer Investment Consulting and Russell Investment Consulting - and may also look at firms with a lower profile in Asia, such as Cambridge Associates, say fund managers.

FinanceAsia reported a year ago that Watson was unlikely to be re-hired. Sources familiar with the NPC today say the NPC will give it a fair review but may be looking for other opinions.

Regardless of the winner, the mandate is going to be more focused and pay a smaller fee, as Watson Wyatt has already done a lot of background work preparing the NPC for international investing. The organization, having gone through the process once, now has an idea of what to expect, what questions to ask, and who the international fund managers are; it reviewed over 140 fund management companies in 2002 for the four equity mandates.

Funding those mandates has been a slow process. State Street Global Advisors, which won the single passive mandate, was the first to get going, partly because there was little haggling over fees, and partly because SSGA was an on-the-ground player that could obtain the necessary licensing.

Fidelity Investments' mandate was reportedly filled only in December following a written commitment to obtain the necessary licenses. Capital International and Wellington International Management have yet to be invested, a year after winning the mandates.

Although rival fund managers believe this is because Capital and Wellington are still negotiating fees with the NPC, other sources say fees have nothing to do with the delay. Rather it is a legal problem: these firms are applying for non-discretionary asset management licenses, which allow them to participate in mandates without putting infrastructure on the ground. But by law, NPC mandates are viewed as discretionary, which has resulted in a regulatory black hole for the past year or so. (In fact, due to conflicting laws, the NPC technically isn't the one investing abroad; Korea Exchange Bank acts as trustee and invests NPC money under its own name; State Street is the global custodian.)

It is not clear what would happen to these unrealized mandates if they remain unfunded by the time NPC decides on another tranche of international equities (if it does so at all). Fund managers believe the NPC will choose a consultant by spring.