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Korea’s pension behemoth eyes alternative investments

South Korea’s public pension fund will keep increasing alternative investments and reduce local equities in the long term, as the behemoth fund’s snowballing assets will be too large for the domestic stock market, its chief investment officer has said.

The National Pension Service, which manages about 524 trillion won ($450 billion) collected from 21 million Korean subscribers, is a significant client for leading asset managers around the world, who are hunting attractive real estate, infrastructure and hedge funds for alternative investments amid low interest rates.

Fund portfolio of the National Pension Service (NPS)
Fund portfolio of the National Pension Service (NPS)

“Should our total assets reach 1,000 trillion won, our investment in local equities would be about 200 trillion won by their current proportion. Under such circumstances, we will crowd out other players in the Korean (stock) market,” said Kang Myoun-wook, CIO of the NPS.

“Surplus funds should be redirected to alternative investments.”

The NPS has traditionally operated its fund conservatively to avoid making losses, as the Korean people regard it as their major source of income after retirement and rarely subscribe to other private pension plans.

In 2015, more than half, or 57.4 percent, of the fund was put in bonds, 31.9 percent in stocks and the rest, 10.7 percent, in alternative investments.

The 10.7 percent asset allocation in alternative investments last year was lower than the NPS’ original plan of 12.8 percent, according to the minutes of the Fund Management Committee’s meeting on May 16. The NPS reaped a 12.3 percent annual return on alternative investments in 2015, while the average return for the overall fund was 4.6 percent.

With its increasing need to yield higher returns, the committee -- the highest decision-making body consisting of the health minister, vice finance minister and national representatives of employers and employees and pension scheme experts -- decided to increase the alternative investments portfolio to 11.9 percent of assets by the end of 2017.

Part of the plan includes putting 1.2 trillion won in two funds of hedge funds. Fund selection will be finalized in September among four candidates -- BlackRock Alternative Advisors, Blackstone Alternative Asset Management, Grosvenor Capital Management and UBS Hedge Fund Solutions.

The Korean public generally see hedge funds as speculative, high risk investment tools, misunderstanding the word “hedge” as meaning high-risk. Kang said this was not a fair portrayal.

“Because of the term ‘hedge fund,’ it is misunderstood as a high risk investment. It is actually mid-risk, mid-return strategy,” Kang said. 
NPS CIO Kang Myoun-wook
NPS CIO Kang Myoun-wook

The fund’s competitive edge in alternative investments was highlighted in 2014 when it reaped about 1 trillion won in returns by selling the head office building of British banking giant HSBC in London to Qatar’s sovereign wealth fund, after buying it cheap in 2009 in the aftermath of the global financial crisis.

However, not every investment decision by the NPS was welcomed.

The institutional investor has faced criticism for voting to approve the merger of Samsung C&T and Cheil Industries last year, which some critics see as benefitting only Samsung Group vice chairman Lee Jae-yong, who is seeking the transfer of control from his ailing father and group chairman Lee Kun-hee.

As for the NPS’ selling of Samsung C&T shares prior to the merger, an appeals court recently said “it is hard to rule out suspicion that such selling was not a legitimate investment decision,” adding that the lower share price of Samsung C&T and higher share price of Cheil Industries may have been beneficial to Samsung Group’s family.

Kang said the NPS had not made any investment decision that would breach any regulation at that time, declining to comment further.

The NPS faces another challenge in keeping and recruiting fund managers because the NPS’ fund managing office under Kang, currently located in southern Seoul, has to join the head office of the NPS in Jeonju, North Jeolla Province, in February next year.

Already short-staffed with only 300 employees, including 200 fund managers controlling 524 trillion won in assets, the NPS has lost some fund managers who sought to continue working in Seoul.

“In operating the fund, manpower is the most important. I hope good fund managers join us, accumulate experience and share their expertise when they go back to the private sector later on,” Kang said.

By Kim Yoon-mi (