South Korea’s National Pension Service (NPS) is planning to revise rules to relax the use of currency trading tools before the end of the year as it steps up its overseas investment push. It is also building its own environmental, social, and governance (ESG) research capabilities for domestic assets.  

Following a fund management committee meeting chaired by the Ministry of Health and Welfare held in Seoul on October 30, the South Korean pension fund announced that it plans to manage the currency composition of its overseas assets more actively to respond to exchange rate fluctuations given its rising foreign investments. 

NPS, which has $625.86 billion under management as of June 30, said in July that it would seek to invest 55% of its assets into overseas assets by 2025, up from its former target of 50% by 2024. 

A spokeswoman at NPS told AsianInvestor the asset owner will set out new regulations to expand the trading tools available to implement active currency management strategies under the revised foreign exchange policy. The pension fund’s management committee has already approved the policy, but it has yet to be officially disclosed by the Ministry of Health and Welfare, she said.

“Currently, we can use some tools such as currency swaps and forwards for foreign exchange management. However, the use of derivatives is limited to some specific purpose or conditions such as hedging,” she said, declining to comment on which trading tools are under considerations in the expanded scope.

NPS is hoping to establish the regulations this year. However, it cannot guarantee that the rules will be ready by the end of this year, she added.

The Korean asset owner has expanded its overseas investment rapidly in recent years, and the need to manage its foreign exchange risks more effectively has become urgent. In particular, currency fluctuations can have a sizeable impact on the fund’s total return, she explained. The committee has decided on some of the tactical considerations involving active currency management, she added.

“Examples of tighter management can include an increase in [the holding of] safe currencies such as the US dollar and the Swiss franc in the event of financial market instability and a decrease in volatile currencies in the case of temporary events such as Brexit,” Business Korea quoted the NPS on November 2. The spokeswoman confirmed the accuracy of the report.

ALT PUSH

Ahn Hyo-joon

NPS's desire to ease the rules by which is manages its FX exposures make sense, in light of recent announcemeents. 

The pension fund said last month that it had extended the term of its chief investment officer, Ahn Hyo-joon, for one more year until October of 2021. The move is seen as an indication that the NPS will continue to expand its cross-border efforts.

Indeed, APG Asset Management of the Netherlands and NPS, which are two of the world’s biggest retirement funds, recently struck a landmark partnership under which they will jointly invest globally in large infrastructure and real estate projects.

The two funds had initiated the tie-up to improve their access to major real asset transactions, increase their bargaining power, reduce investment costs and, ultimately, improve investment returns, Ahn and a senior executive at APG Group said last month in a video call.

The CIO has made progress in enhancing NPS’s international investment capabilities and expanded the fund’s network with market leaders, the NPS spokeswoman said.

NPS is planning to raise its alternative investments to 15% of its portfolio by 2025, including domestic and overseas assets. As of the end of August, NPS’s alternative investment assets account for 12% of the fund’s total assets, valued at W92 trillion ($82.5 billion), she added.

MORE ACTIVE ON ESG

NPS is also seen as becoming more proactive and vocal on ESG matters. Late last month, NPS said it would oppose LG Chem’s plan to separate its battery business into a new company, citing concerns about erosion of shareholder value.

LG Chem, an electric car battery supplier for Tesla and General Motors, was planning to separate the business as the electric vehicle market takes off. NPS was the second-largest shareholder of LG Chem with a 9.96% stake as of end-June.

The spokeswoman did not comment on NPS’s reaction to LG Chem’s business plan. However, she said that the fund is building up its internal research to look into ESG factors for domestic equity assets.

Under an action plan approved by the fund management committee in November 2019, NPS will phase out assets in the portfolio that do not meet the pension fund’s ESG standards, she said.

The Korean pension fund is also preparing a way to reinforce impact investing on the external management of its funds because responsible investment will be applied to about 50% of its total assets by 2022.