Korea’s national fund steps on the gas with global shift

The $200 billion National Pension Fund of Korea, which like many Asian funds sailed through the global crisis virtually unscathed, is looking to reduce its big overweight to fixed interest in favour of international equities and other growth assets.

The trend to more international assets actually started several years ago, but was suspended in 2008 when the fund suffered its first negative return since inception in 1987. That negative, a negligible minus 0.8 per cent, of course, compares with double-digit negatives for most big pension funds in the world.

“By 2009, we were back to normal with going global and going active,” according to Kyungjik (KJ) Lee (pictured), the head of global equities and fixed income for the National Pension Service, which manages the fund as well as the Korean national pension system.

There is more urgency about the Korean fund’s growth aspirations compared with most government pension funds, however, given the country’s demographics. By 2050 Korea is expected to be one of the “oldest” countries in the world as a result of increased longevity and a birthrate which has declined sharply since the 1960s. The demographics are made worse by a low household and personal saving rate compared with other nations.

The move to more international and more growth assets has been gradual. As of July this year, 70.1 per cent of the fund was still invested in domestic fixed interest and a further 4.6 per cent in international fixed interest. Domestic equities accounted for 14.3 per cent, overseas equities 5.8 per cent and alternatives 5 per cent.

“We are trying to go global and add more risk assets,” KJ says.

The fund has set targets for its strategic asset allocation for the next few years. It aims to reduce domestic fixed-interest to below 60 per cent by 2014, at the same time increasing domestic equities to more than 20 per cent, overseas equities to more than 10 per cent, overseas fixed interest to more than 10 per cent and alternatives to more than 10 per cent.

For such an historically conservative fund, the current alternatives allocation of 5 per cent stands out.

KJ says the fund has tended to see mainly the big-name private equity managers such as KKR and Carlisle. “But we’re in the very early stage of the program,” he says.

He is not too concerned with benchmarks: “I have to make money. What does it mean to beat the benchmark?”

Before his current role, KJ headed the external funds management team at the country’s $38 billion sovereign wealth fund, Korean Investment Corporation. He has an economics degree from Seoul National University and an MBA from the famous Wharton School in the US. He is also a CFA charterholder.