The National Pension Service, the $311 billion state pension fund of South Korea, intends to expand its outsourcing programme for external managers in several asset classes, but will begin to increase the portion of international equities it manages internally.
Officials at NPS say that, in general, the fast pace of asset growth necessitates adding third-party fund managers. Only this month NPS revealed that it had been awarded a qualified foreign institutional investor (QFII) licence by the China Securities Regulatory Commission (CSRC). It hopes to receive a quota and start investing before the end of this year.
Today 12.9% of its AUM (about $40 billion) is invested in international assets, but that is slated to rise to 16% by 2016. By that point its total AUM is expected to reach $500 billion, suggesting international exposures of $80 billion, double today’s level.
The NPS first invested overseas in 2009. Officials say it currently outsources 80% of its global fixed income mandates, which will continue. It also has a mix of outsourced alternative investment mandates, as well as a portfolio of direct holdings in such things as US real estate and Brazilian natural-resource companies.
But it is looking to do more international equities by itself, reflecting increased confidence in its team. “As the world’s fourth largest public pension fund, NPS is positioning itself as a global leader, developing global competence in fund management,” says the official.
However, NPS has no plans to fire equity managers (at least not because of a desire to insource). Instead as its coffers swell it will dedicate proportionally more new assets to the internal team.
Moreover, the portion that is insourced is relatively modest, and is set to rise from 10% of international equity assets to 15% over the next 12 months.
Over time, therefore, as assets grow, the NPS will continue to add new third-party managers, albeit at a slower rate. Officials say emerging markets are likely to play a larger role in the equities portfolio. These now account for 20% of its overseas exposure.
In 2011 it opened an office in New York which now houses five staff. The office is mainly involved in market and manager research. It intends to open a similar office in London this year. For now these offices are not engaged in trading activities, although that could change in the next few years.