Why NPS’s performance is an “advert” for alternatives

South Korea's public pension fund, the world’s third-largest, posted a negative return last year. But it's not the whole story; there's an alternative(s) angle.
Why NPS’s performance is an “advert” for alternatives

It inevitably drew some unwelcome publicity for National Pension Service when South Korea’s flagship public pension fund posted a negative return in 2018, but it is still doing some things very right.

The world’s third-largest pension fund, with KRW565.5 trillion ($499 billion) under management as of end-2018, could to some extent claim it has not done much wrong. After all, equity markets generally had a torrid time last year.

Domestic stocks delivered a negative return of 16.77% for NPS in 2018, while overseas equity made a loss of 6.19%. With stocks at home and abroad making up 35% of its portfolio, it is not surprising therefore that NPS posted a negative 0.92% return on average. 

But stock markets, generally, are cyclical in nature. So in these asset classes the key is to remain focused on the long-term strategy, especially in the case of very large investors such as NPS with billions of dollars collectively invested in equity.

“As long as large investors are still achieving their income stream and can match up against their liabilities from that perspective, then the total value may have gone down, but will come back,” the Asia-Pacific head of a US-based asset owner familiar with NPS’s investment strategy told AsianInvestor on condition of anonymity.

“They will instead look at drop in markets as a potential buying opportunity because they have got the cash to spend,” he said.

The biggest success story for NPS was its alternatives portfolio, which made an annualised return of 11.8%, followed by global and domestic fixed income, which both made a return above 4%.

According to an internal source at NPS, who declined to be named, there is widespread recognition of the performance of the fund's alternatives teams. 

By comparison, Japan's Government Pension Investment Fund (GPIF) had produced a total negative investment return of 4.31% for the three quarters to December 31, after a weak final three months to the calendar year. As of end-2018, GPIF only had 0.21% of its ¥150 trillion ($1.35 trillion) invested in alternatives.

“The NPS case is absolute evidence to any investment committee of these big institutions [in the region] that they should be doing more in terms of diversification into the alternatives bucket. This is the perfect live advert for them, no question,” the Asia-Pacific head of the US asset owner said.

According to official documents on NPS’s website, it aims to grow its target allocation to alternatives to 12.7% in 2019 and to around 15% by 2023 from 12% in 2018. Based on the pension group's assets under management in 2018, that would equate to an extra $15 billion of investments by 2023.


NPS appointed Ahn Hyo-joon in October as chief investment officer to serve for a two-year term.

Ahn Hyo-joon

The announcement followed a few years of commotion within its investment teams, partly due to the relocation in 2017 of the pension fund’s headquarters from Seoul with over 10 million people to the much smaller city of Jeonju some 200 kilometres south.

The CIO role had been left undecided since Kang Myoun-wook resigned in July 2017. Cho In-sik, the NPS’s former head of global public market, had been acting CIO but then stepped down in July 2018.

Ahn has 18 years of financial industry experience, both domestically and overseas. He also led the NPS’s investment strategy team from 2011 to 2013 as domestic equity head before leaving to become chief executive officer of Kyobo Axa Investment Managers in 2013. Ahn came back to NPS from a role as president of the global division at Korean financial conglomerate BNK Financial Group.

As such, Ahn knows NPS from the inside, including the demands of its stakeholders, and also has experience of domestic and global markets from the commercial sector. The sum of these experiences will come in handy when the marginal space to maneuver within NPS’s overall investment strategy is to be facilitated and timely tweaks are to be made, according to a Hong Kong-based investment adviser who works with Korean institutional investors. 

“Ahn’s various qualifications hold synergy effects that will contribute positively for the future. We believe that the organisation is quite stabilised after he came onboard,” the advisor said on condition of anonymity.

Investment strategy tweaks might indeed be needed to avoid any additional negative returns, especially since NPS plans to increase its allocation to equities to around 45% by 2023.

Yet the cycle may work in NPS's favour, especially now that US interest rate rises appear to have paused and stock markets are on the upward march again. Accordingly, NPS has already posted a return rate of 4% for the first two months of the year.

Given Ahn’s background, he knows already the scale of the task that lies ahead of him and the degree to which NPS's stakeholders will place future wobbles under further scrutiny. But at very least he can also take some comfort from knowing that NPS has a relatively larger alternatives leg to lean on.

For further insights on how Korean Institutional investors are further internationalising and diversifying their portfolios, look out for AsianInvestor's 13th Institutional Investment Forum in Korea on April 10.

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