Korea’s National Pension Service has started reviewing its existing list of domestic and global custodians after recently appointing a new chairman and CEO, who is expected to pursue a more aggressive allocation plan globally.
The $360 billion retirement fund will post request-for-proposals on its website from late July to early August, inviting custodians to bid for mandates across a variety of asset classes, including domestic equities, fixed income, alternatives and fund administration. NPS will then post RFPs for overseas equities and fixed income mandates in late August, a spokesman tells AsianInvestor.
Under new chief Choi Kwang, NPS set an aggressive allocation plan in June, announcing its intention to boost exposure to domestic and international equity and alternatives, after coming under pressure due to lacklustre annual returns in 2012 compared with international peers.
Competition is expected to be fierce – global banks can bid for local asset classes, which means Korean firms will be up against foreign players.
A source says existing domestic mandates up for review include Shinhan Bank (for equities); Korea Exchange Bank (for fixed income); Woori Bank (for alternatives); and Shinhan Aitas (for fund administration).
Meanwhile, NPS’s two global custodians – JP Morgan (global fixed income) and Citi (global equities), which received mandates in December 2010 – are nearing the end of their three-term contracts, and are expected to have to re-bid for their mandates. Executives at these banks refused to comment.
“We expect that a shortlist of preferred bidders will be narrowed down around late August for the domestic mandates,” the NPS spokesman says. “Then we will proceed with further negotiations with these short-listed banks with an aim to finalise a decision.” NPS will likely finalise foreign custodian mandates after local ones.
(Sources say reviewing custodians is a regular exercise for NPS, with one conducted every three years.)
According to NPS’s latest financial report, in the first half of 2012 the fund’s largest allocation was to domestic fixed income, with some 232.15 trillion won ($207.9 billion) in the asset class. Domestic equities came second (W62.35 trillion), followed by overseas equities (W25.43 trillion), alternatives (W28.91 trillion) and overseas fixed income (W17.26 trillion).
Among foreign banks contacted by AsianInvestor, BNY Mellon appears to be the keenest on pitching for the business.
“BNY Mellon previously served NPS as one of its global custodians since the fund started engaging global players around 2003, [and we] will be interested in bidding for both overseas fixed income and overseas equities mandates,” says Michael Chan, head of Asia asset servicing at BNY Mellon.
Lawrence Au, head of Asia Pacific at BNP Paribas Securities Services, notes that Korea has not been on the bank’s target list until recently, adding that his firm “will be evaluating the opportunities to see how best we could potentially support the client with their specific service expectations and cultural differences if we did go for it”.
Another of the big global custodians, State Street, declined to comment for this article.
All eyes are on domestic players, which, unlike their global counterparts, have in many cases been engaged with NPS for at least three years. “In some cases they have been custodians for six years or more,” a source says.
Market participants expect competition for the equities mandate to be particularly fierce after Choi in June discussed NPS’s plans to increase domestic equity exposure to 20% by the end of 2014 from 18.7% at the end of 2012; global equity investments to 10.5% from 8%; and alternatives to 11.3% from 8.4%.
These new allocations will be funded by paring back its domestic fixed income allocation to 54.2% from 60.2%, and global bond exposure to 4% from 4.7%.
According to its 2012 annual report, 23 million NPS members are targeting a diversified fund portfolio with less than 60% in domestic fixed income, over 20% in domestic equities, more than 10% in overseas equities and alternatives and less than 10% in foreign fixed income by 2017.
In terms of AUM, NPS is the fourth largest pension fund in the world.