The National Pension Corporation, which manages the $53 billion national pension system for South Korea - the nation's largest pension fund - has just mandated Watson Wyatt as its investment consultant for international investments, according to market players.
The move is not only significant as a piece of business for Watson Wyatt, which affirms its lead in mainland Asia's investment consulting market, but for launching Korea's institutional presence overseas.
Korean investors, both retail and institutional, have traditionally shied from overseas investing, with only one or two names such as Samsung Life Insurance having any meaningful offshore exposure. Virtually no pension funds invest overseas. Korean investors tend to view anything offshore as 'risky' and Korean fund managers lack the expertise to invest internationally.
That is set to change with the NPC s move. The assets under management at NPC are rising so quickly that it recognizes the need to diversify overseas. Last year it began outsourcing mandates to third-party professional fund managers for domestic equities, and has been moving toward offshore investments since.
The NPC was supposed to have chosen a consultant last summer, but internal delays - the NPC is an arm of the Ministry of Health and Welfare, subject to bureaucratic infighting - have kept everyone waiting.
Hiring a consultant, however, has moved NPC past a key hurdle. It has already come to an understanding with the central bank about moving funds offshore. Institutions are prohibited from sending more than $50 million out of Korea, as the central bank fears the impact on the currency.
But, explains Chang Kil-hoon, head of NPC's outsourcing team, NPC was able to get its status officially changed to that of an individual investor. It has also created a framework to invest abroad via a designated trust bank account that handles the transactions.
The next step is for NPC and Watson Wyatt to determine the asset allocation for the W500 billion ($400 million) international mandate, then choose fund managers and a global custodian. Chang hopes to begin investing offshore by May or June.
Mike Reed, managing director at Franklin Templeton in Seoul, says that having a consultant involved will make the manager selection process much more transparent than is normal in Korea, where many choices come down to relationships, not professional qualifications. "This is a very positive thing. We don't have to go golfing to compete for the mandate," he says.
The selection of Watson Wyatt is a blow to the two other consultants on NPC's shortlist, Frank Russell and William M Mercer. Russell is well entrenched in Japan but has no presence in the rest of Asia. The firm had hoped to use its Japan experience to enter Korea. Mercer has aggressively built its Asia and Japan presence from its Australian stronghold but failing to get NPC is a bitter result.
One rival grumbled that Watson Wyatt won solely on price. The shortlist was based on an intense screening process but the final decision came down to who was cheapest, he says, adding that Korean institutions remain unwilling to pay for quality advice.