South Korea's National Pension Corporation, which manages the $75 billion national pension system, has mandated four fund management companies for its first international investment experience: Capital International, Fidelity Investments, State Street Global Advisors and Wellington International Management.

The total international tranche is W500 billion, which divided among the four, means roughly $100 million to each firm. All are for active equity portfolios benchmarked to the MSCI World Index, except for SSGA's, which is passive (and also a little smaller, roughly $90 million). Watson Wyatt consulted the NPC.

This was among the most highly competitive mandates in the region, with over 140 fund management firms bidding, and with a shortlist of 12, three of which were passive managers. The finalists pitched in December.

But the decision has raised some eyebrows. It is considered a ‘safe' investment; the investment committee selecting managers included employer and union representatives that strongly favoured international brand names – small comfort to firms with equally strong brands that lost. But none of the winners has an onshore investment license, exasperating competitors already on the ground.

According to sources familiar with the process, the NPC is now in the process of filling in the details for the passive allocation. Because it is passive and because SSGA has operated in Korea, this is expected to go smoothly. The other mandates, however, could take time before they are implemented.

One reason is because the fees have yet to be negotiated. Although some of the candidate managers are said to be insisting on fees of around 55 basis points, the NPC is unlikely to accept this. Whether these major US names are willing to walk away if they don't get the fees they demand remains to be seen; there are eight other shortlisted candidates which would be eager to usurp the mandate.

Second, these three firms need to get a license. Fidelity is the furthest along; it plans to apply for an investment advisory license in February, followed by a non-discretionary asset management license and ultimately an investment trust management license. Nonetheless it may not actually have the license in hand right away, creating a legal grey area if the NPC wants to implement the mandate immediately.

Capital and Wellington are said to be applying for non-discretionary asset management licenses, which have the lowest requirements in terms of capital and no requirement to base personnel on the ground, although they may hire local analysts.

This raises the question of whether a firm with just a non-discretionary asset management license can in fact manage NPC assets, which are mandated on a discretionary basis. There is a complicated reason for this, based on problems involving Korea's hard line against transferring data out of the country and how foreign regulators therefore treat Korean firms and vice versa. The end result is that fund managers may need to operate in a grey area, at least initially.

So it may be many months before all these issues are resolved and the managers can start their work. Further complicating the matter is that, according to sources in Seoul, the NPC is not going to renew its contract with Watson Wyatt, so the consultant may not be around to handhold the managers through this follow-up process. The NPC as a political institution has an extraordinarily difficult time justifying fees of any sort. It will go it alone as much as possible. It also has all the shortlisted candidates' performance data and could easily pick candidates from that pool if need be.

The entire offshore investing scheme has required a lot of legal bending and twisting. A strict interpretation of Korea law would suggest that NPC can't, in fact, invest abroad. It has come up with a programme in which Korea Exchange Bank, acting as trustee, uses its name to invest abroad, with NPC telling it what to do. State Street is the global custodian.

The NPC is expected to conduct another round of searches for international managers toward the end of the year. According to people connected to the pension fund, it will probably add new managers and rotate them.

Although some sources believe this second round will be for fixed-income mandates, people close to NPC say the organization will manage this asset class itself as long as Korean interest rates remain higher than international ones. Also the international fixed-income tranch is expected to total W2 trillion, and the NPC is loath to pay fees on such a large amount. Rather the next round will seek equity specialists, as the NPC experiments with style and sector allocations.