Why NPS is shaking up its alternatives teams

As Korea's flagship pension fund further builds alternative exposure, it is trying to make decision-making more efficient. Some observers question the planned structure,
Why NPS is shaking up its alternatives teams

Korea’s National Pension Service plans to restructure its alternative investment team heading into 2017, to better manage its ongoing embrace of such assets, according to NPS officials.

The $461 billion state pension fund will create a new deputy chief investment officer role to overlook all private-market investments, as well as combine domestic and overseas alternative investments. Internal sources speaking to AsianInvestor requested anonymity.

“They are putting everybody under the same roof,” said Andrew Shin, head of investment services for Korea at Willis Towers Watson in Seoul. This will make allocating to alternatives both at home and abroad more efficient. “It would be made by one decision,” he said, referring to the proposed deputy CIO role.

Initial news of this latest shake-up at NPS, Asia’s second-largest pension fund, emerged last week. This includes putting in place the new CIO for private-sector investments, who will oversee divisions running private equity, real estate and infrastructure, regardless of geography.

It also plans to create another deputy CIO post overseeing domestic equity, domestic fixed income, global public markets (including equity and fixed income) and investment operations. Sources tell AsianInvestor that both newly created roles will report to Kang Myoun-Wook, the fund’s CIO appointed in February.

A spokeswoman at NPS said the alternatives team reorganisation “is a long-term consideration” but declined to offer additional information.

A senior executive at the fund told AsianInvestor: “It is under discussion with the government, but not yet decided. This is one thing the fund will try to do in the next year."

It comes after the state pension fund’s reshuffle of senior executives in July, when former domestic alternatives head Yoo Sang-Hyun replaced Yang Young-Sig as global alternatives head. Meanwhile, Lee Su-Cheol, former strategic research team leader under the investment strategy division, was promoted to take up Yoo’s role as domestic alternatives head.

Presently, both overseas and domestic alternative heads – Yoo and Lee – are at the same rank, while the CIO’s role covers all investments. Thus, the proposed new deputy CIO for alternatives is designed to improve the fund’s internal communication by sitting between them.

Some observers questioned this structure, noting it could raise competition between domestic and overseas deals if they are viewed as the same asset class.

“There are more things to consider for overseas deals – for example, currency hedging, market research, information of GPs [general partners] and language barriers,” noted a Seoul-based consultant, who asked to remain anonymous. He questioned the logic of abolishing formal geographical divisions, because he thinks overseas investments require a different set of skills.

As an early mover in private markets, NPS had allocated $48 billion, or 10.4% of its portfolio, into alternatives as of August. As a portion of total AUM, this is nearly double the allocation of six years ago: as of the end of 2010, alternatives accounted for 5.8% of AUM.

Of that $48 billion, about one-third ($18.5 billion) is in domestic assets and two-thirds ($30 billion) invested overseas. The fund’s target for its total alternatives allocation is 11.9% by the end of 2017.

Throughout NPS’s history, it focused alternative investing on private, illiquid assets, but it has recently moved into hedge funds, too. Earlier this year it handed out $1 billion mandates to BlackRock and Grosvenor.

Such exposure represents just 0.2% of the pension fund’s portfolio; its regulator, the country’s wealth ministry, has allowed it to put up to 0.5% of total AUM in hedge funds.

While in 2015 the alternatives portfolio added a major boost to NPS’s total performance, contributing 12.2% that year, so far in 2016 it has been lacklustre, adding only 0.2% in the first eight months, according to NPS data.

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