Korea’s National Pension Service (NPS) is taking a more active approach to its fixed income and alternative investments by cutting the outsourced percentage of foreign bonds and establishing a dedicated investment team for private equity and debt.

The pension fund revealed the initiative at end-August, at the same time as it disclosed that its assets under management (AUM) had reached W908.3 trillion ($780 billion) by the end of June, surpassing W900 trillion for the first time, after a global stock rally fueled a 7.49% return in the first half of this year.

NPS return in the first half of 2021 (Source: NPS)

By the end of 2022, NPS wants to have cut the percentage of its foreign bonds managed by outsiders from 53.5% to 40%. It expects the plan to save W13 billion ($11.2 million) in annual costs, its fund management committee said in a meeting with Korea’s Ministry of Health and Welfare on Aug 25.

NPS has expanded internal capacity to realize the plan. In January, it expanded the overseas bond office by setting up two new teams for overseas bonds and credit respectively, the committee noted.

It also plans to create, possibly by as soon as the end of September, a dedicated team to manage private debt and secondary deals, a spokesperson told AsianInvestorLocal media reported that the team will be called the alternative strategy and investment team, and will be part of the private equity and venture capital investment division.

BE ECONOMICAL

NPS’s latest disclosure on Aug 25 showed that its management and operating expenses had shot up by more than a fifth (21%) in four years, from W577 billion in 2016 to W697 billion in 2020. Expenses for the first half of this year have already reached W365 billion.

As well as a cut in fees, NPS hopes more active management of foreign bonds will help it achieve higher returns and more liquidity, should it need to respond quickly to any sudden market fluctuations by selling stable assets and buying cheap overseas stocks and alternative assets.

Source: NPS (Click for full view)

The pension fund’s foreign fixed income positions – a total of W52.4 trillion - accounted for 5.8% of its AUM at the end of June. These were made up of government bonds at 43.8%, followed by 24.1% of corporate bonds, 17.7% of government-related bonds, and 14.4% of securitized debts.

Over half of these assets were managed by 16 companies as of end-June. They include Brandywine, Macquarie, Franklin Templeton, Morgan Stanley Investment Management, PIMCO, Prudential, Allianz Global Investors, TCW, World Bank, T. Rowe Price, and J.P. Morgan Asset Management.

“NPS’s internalisation of overseas bond management is in line with industry trends,” said Diego López, managing director of Global SWF, a data platform that tracks sovereign wealth funds and public pension funds.

“State-owned investors are trying to compensate for their focus on private markets, which are normally externally managed, with tighter control of their investments in public markets. As a result, an acceptable level of fees can be paid to external parties in alternative investments instead,” he told AsianInvestor.

HARD TO GO ALTERNATIVES

As of end-June, 170 asset managers were responsible for managing NPS’s near-W70 trillion of overseas alternative investments, the fund disclosed on Aug 25.

Its move to launch a dedicated private debt and equities team came after it began a program to hire 54 investment managers in April, with about half of positions on private markets.

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NPS’s alternative assets only accounted for 10.7% of AUM at the end of February, and fell further to 10.4% by end-June, despite an increase in the amount from W90.7 trillion to W94.6 trillion ($81 billion).

In 2017, it set a target of raising alternative assets to 15% of the portfolio by 2022. The deadline has since been extended to 2025, with a new goal of 13.2% by the end of this year also in place.

Source: NPS (Click for full view)

In its latest public filing, NPS attributed the decrease in the proportion of alternative investments to “poor execution and public assets overweight”.

Like most pension funds, global equities were the best performers in NPS’s portfolio in the first half, with foreign equities returned 17.7%, and domestic securities gained 15.6%, both beating the KOSPI (up 14.7%) and MSCI ACWI ex-Korea (up by 12.9%) benchmarks.

On the other hand, alternative assets only returned 4.97%, most of which were interest, dividends, and transaction gains. Overseas fixed income contributed 2.27% with a rise in the won-dollar exchange rate, while domestic bonds suffered 1.16% of loss.

“Bear in mind that the financial markets are at all-time highs, which means that the value of equities keeps increasing and decreasing its relative weight in the overall pie is even more difficult,” Global SWF’s López said.  

“If NPS manages to deploy enough capital, and the financial markets suffer a significant correction, the year-end goal might still be achieved, but it does sound challenging,” he noted.