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South Korea's NPS to invest half of total assets abroad by 2024

By Asia Asset Management  
June 5, 2019

South Korea’s National Pension Service (NPS) plans to gradually increase foreign investments to half of its total assets within five years by more than doubling allocations to global bonds and stepping up exposure to foreign stocks.

About 30% of the pension fund’s assets is currently invested abroad. The share will be increased to 50% by the end of 2024 as the fund aims to invest as much as 10% of its assets in foreign bonds, up from 4.2% at the end of last year, and increase investments in foreign stocks to 30% from 20%, the Ministry of Health and Welfare, which supervises the fund, says in a May 31 statement detailing the NPS’s latest five-year asset allocation plan.

The public pension fund, which releases the plan annually, will look for “foreign corporate bonds and the like with higher yields than government bonds”, the statement says. It will also reduce investments in domestic bonds to about 30% from 46%.

The NPS is aiming for an annualised average return of 5.3% through to 2024, similar to the 5.24% registered over the 30 years since the fund was established in 1988 up to 2018.

The statement did say why the NPS is looking to raise its foreign investments.

According to Della Lin, a senior analyst at US investment consultancy Cerulli Associates, the fund may be looking to build a defensive approach to asset allocation amid tensions over the US-China trade war and tougher macroeconomic conditions.

“However, the need to meet future liabilities could be a likely reason for the pension fund’s focus on overseas investments, which offer greater flexibility and potentially higher returns,” Ms. Lin tells Asia Asset Management (AAM).

She says the move could present a “good opportunity” for external asset managers as almost 60% of the NPS’s foreign bond investments were outsourced to third-party managers in the first quarter of this year.

A Hong Kong-based investment consultant says the NPS has to raise its foreign exposure for better returns after performing poorly last year with a record investment loss of 0.92% amid global trade tensions and weak financial markets.

But the Korean pension fund may not be the only one that will have diversify investments in search of better returns.

“Although the [NPS’s] allocation targets may be readjusted because of the changing market condition, overseas and alternative diversification will be the major direction not only for NPS but also for most Asian pension funds,” the consultant tells AAM, speaking on condition of anonymity.

The NPS, South Korea’s biggest pension fund, and the world’s third largest, had around 574 trillion won (US$486.4 billion) of total assets as of March 2019.