Korea fixes on a riskier strategy

ip090610The $260 billion National Pension Scheme of Korea plans to double both its international fixed-income and international equities exposures in the next four years. According to Ha-Young Kim, head of institutional networks and communications at the NPS, it is part of a survival plan for the fund for 49 million Koreans. Amanda White reports.

The $260 billion Korean National Pension Scheme fared well during the financial crisis, returning a modest -0.18 per cent. It has also done well in the current year, returning 5.76 per cent in the financial year to March 2010.

This was due to its over-allocation to domestic fixed-income, which until last year was about three-quarters of the fund.

But while this worked well during challenging investment times, the NPS has realised the long-term survival of the fund rests on a more aggressive allocation.

With this in mind, Ha-Young Kim, head of institutional networks and communications at the NPS, says it has decided to double the $30 billion it invests outside Korea, across all asset classes.

“Projections show that in 2060 the fund reserves will be depleted if the conditions are the same. So it is critical to raise the return by investing in more risky assets such as equity and alternatives,” Kim says. “We hope the life of the fund will extend by increasing growth allocations.”

The National Pension Service, which is responsible for the operation of the fund as well as other matters entrusted by the Ministry for Health and Welfare, only started in 1988 and now has 91 regional offices and nearly 5,000 staff members.

With an initial contribution rate of 3 per cent, over time that has increased to 9 per cent.

The fund’s management centre, which is the asset manager of the fund, employs 121 staff, 92 of which are investment professionals.

They are divided into six divisions: investment strategy, risk management and then public markets (equities), alternative investments, global investment, and operations.

At present, the fund is still majority-invested in domestic fixed-income with a dollar allocation of $178.6 billion. Other allocations: are international fixed income ($9.8 billion), domestic equities ($33 billion), international equities ($12.6 billion), domestic alternatives ($8.5 billion), international alternatives ($3.8 billion).

“We have had a very stable structure because of our focus on fixed-income. But we need to enhance returns, so have decided on a move to more risky assets,” Kim says.

“Reform is on the agenda to ensure long-term viability, and increase transparency.”

The fund’s 2009 strategic target included allocations of 4.1 per cent to overseas fixed-income and 3.6 per cent to overseas equity. Over the next five years both asset classes will be increased to 10 per cent each of the allocation.

That is an injection of billions of dollars into the overseas fixed income and equities markets in the next five years, based on today’s dollar value of the fund.

The fund also has about $1.2 billion invested in an externally managed SRI (Socially Responsible Investment) fund and there is a plan to increase that allocation as well.

The fund, and the Korean Government, is focused on climate change in particular and this month will host the Seoul Pension Summit, with investors from around the world collaborating to examine investment in climate change.

The NPS’ international investment began in 2003 with external managers, in 2009 it began moving the management of those assets to in-house management and now $26.9 billion in total is managed by that team at March 2010 that was $9.8 billion in fixed income, $12.6 billion in equities and $3.8 billion in alternatives.

While the fund is interested in capitalising on the opportunities in China, and is applying for a licence to invest there, for the most part the international investments are focused on developed markets.

Within alternatives which include real estate, infrastructure and private equity – investments are focused on landmark buildings in great cities” and investments include Aurora Place Sydney, HSBC Tower in London, and 40 Grosvenor London.

Asset allocation Target 2009 2010 2014
Domestic equity 15.2% 16.6% 20%
Overseas equity 3.6 5.1 10
Domestic fixed income 72.1 67.8 60
Overseas fixed income 4.1 4.1 10
Alternative investment 5.0 6.4 10