Korea’s National Pension Service (NPS) is set to expand and refine its allocation to alternative investments in order to diversify and shield the pension fund’s overall performance from public market fluctuations.
NPS had committed W204.4 trillion won ($156.7 billion) to alternative investments as of end 2021, up 32.7% from the previous year, the NPS said on August 12. The world’s third-largest pension fund managed W912.4 trillion as of end May 2022, with 14.4% invested in alternatives.
The alternatives share is relatively large compared to NPS’s Japanese peer, the Government Pension Investment Fund (GPIF). The world’s largest pension fund entered the alternatives market much later in 2013, and although it is growing rapidly, the alternative investments made up 1.32% of the ¥193 trillion ($1.5 trillion) portfolio as of end June 2022.
As of end May, the year has so far shown an overall negative return of minus 4.73% for NPS. It is therefore likely that NPS will see its second negative annual return since 2013.
The latest negative annual return was in 2018, at -0.92%. Like 2022 so far, 2018 saw public equities take a beating in a similar trend. The S&P500 index, for instance, also saw its only negative annual return within the last decade in 2018, at -4.38%.
It is worth noting NPS’s relatively small negative return in 2018. While this could have also been attributed to its fixed income allocations (42.1% as of end May), the biggest success story for NPS in 2018 was its alternatives portfolio, which made an annualised return of 11.8%, followed by global and domestic fixed income, which both made a return above 4%.
Up until end May, the same trend was prevalent in 2022. While domestic and global equities had made negative returns of -7.68% and -8.61%, respectively, alternatives had a profitable return of 4.44%. Still, the overall negative return of -4.73% was further weighed down by negative returns for domestic and global fixed income at -4.19% and -2.5%, respectively.
Although valuations for alternatives don’t come with the mark-to-market that public equity must adhere to, alternatives have nevertheless seemed to help NPS with downside protection when public markets experienced a general downward trend.
THE LION’S SHARE
As of end 2021, private equity commitments took the largest share of the alternatives portfolio, with W84.6 trillion won. That was followed by real estate with W66.5 trillion and infrastructure with W47.1 trillion. The pension fund committed less capital to hedge funds and multi-assets, with 4.4 trillion won and 1.8 trillion won allocated respectively.
Capital invested in the top three asset classes was still less than half of its total commitment in 2021. The pension fund invested W34.5 trillion into private equity, W32 trillion into real estate, and W27.9 trillion into infrastructure.
Its private equity investment increased 25.6% year-on-year, while hedge fund investment leaped 59.9% to W3 trillion won as of end 2021.
NPS had made investments in 404 domestic and overseas private equity funds as of end 2021, an increase of 55 from end 2020. The pension fund didn’t disclose the investment size in each fund in the announcement, and also excluded funds which haven’t made capital calls yet.
Within private equity, Carlyle Group was the most preferred fund manager as of end 2021, according to the August 17 disclosure. NPS had invested in 14 funds of the US asset management firm. Blackstone was second-largest private equity manager, with 12 funds.
In the real estate sector, the pension fund shirked from domestic properties and focused abroad instead. As of end 2021, its Korean real estate investment totaled W5.3 trillion, down 9.3% from the previous year. Overseas real estate investment, meanwhile, reached W26.6 trillion, up 14.8% from end 2020.
The pension giant invested W27.9 trillion in infrastructure as of end 2021, up 12% year-on-year. By region, North America led with 25.1%, followed by Europe and Asia with 20.2%, and Australia with 14.4%. Latin America accounted for a mere 0.6%. Project-based funds accounted for 55.2%, and blind pools made up the remaining portion.