Korea's NPS to boost alternatives exposure

NPS, which had KRW406 trillion ($360 billion) in assets under management as of March, is altering its strategy after posting an annual return of 6.99% for 2012, 0.3 percentage points above the annual average return since 1988, but below that of many of its global peers. The Ministry of Health & Welfare blamed the comparative underperformance on an overexposure to fixed income products while other pension funds have been increasing investment in equities.

California Public Employees' Retirement System (CalPERS) posted a return of 13.3% for the 2012 calendar year, while California State Teachers' Retirement System (CalSTRS) saw its portfolio return 13.5% for the period. Both were below their custom benchmarks but equities investments performed strongly.

Ontario Teachers' Pension Plan (OTPP) posted a return of 13% for 2012 with equities outperforming the benchmark.

In addition to raising the alternatives allocation, NPS will increase its domestic equity exposure, which stood at 18.7% at the end of 2012, to 20% by the end of 2014. Foreign equity investments will rise from 8% to 10.5%. The domestic bond allocation will fall from 60.2% to 54.2%, while foreign bond exposure will be 4%, down from 4.6% at the end of 2012.

Under this new strategy, NPS is expected to have KRW482.4 trillion in assets by the end of 2014, of which KRW54 trillion will be in alternative investments. At the end of 2012, the pension fund had KRW33 trillion in alternatives.

NPS first indicated the strategic shift in its latest five-year asset allocation plan, unveiled at the end of May. The target return for 2014-2018 is 6.1%, down from 6.6% for 2013-2017, driven primarily by the domestic and international macroeconomic outlook.

The plan identified diversification - increasing foreign and alternatives exposure - as a specific target, with the alternatives allocation set to reach more than 10% by the end of 2018. In line with the most recent announcement, allocations to domestic and foreign were due to increase while bond investments fell.

Japan's Government Pension Investment Fund (GPIF) has embraced a similar approach, announcing a review of investment strategy that is likely to see a reduction in bond exposure and an increased equities weighting. GPIF doesn't participate in alternative assets but this too is under review. 

GPIF, which is expected to deliver an annual yield that exceeds nominal wage increases by 1.1% in the long term, delivered a 2.42% annualized return between 2003 and 2011, trailing NPS by a significant margin.

NPS is by some distance the largest LP in domestic private equity in South Korea. It is also increasingly active in supporting outbound M&A initiatives, facilitating the creation of partnerships between PE investors and corporates, as well as making commitments to international GPs.

Kwang Choi, an economist who served as health and welfare minister in the late 1990s, was appointed chairman and CEO of NPS last month. He replaced Kwang-woo Jun.

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• Topics
• North Asia
• LPs
• National Pension Service (Korea)
• LPs
• South Korea