South Korea’s state-run National Pension Service (NPS) is poised to pour more than $40 billion into overseas equities and bonds in the next five years, in line with a decision made at a meeting of the NPS Management Committee on May 16, where decisions on NPS Mid-term (2017-2021) Asset Allocation Plan were laid out.
NPS assets are projected to expand to 1000 trillion won in 2022 from 500 trillion won as of the end of 2015.
However, it is set to increase its allocation of offshore assets from 20 percent to 30 percent in order to sidestep low interest rate and weak growth in the domestic market, according to MandateWire, a research service from the Financial Times.
A local daily reported that the NPS would raise its allocation to overseas equities 4 percentage points to 20 percent by 2020, while cutting its domestic equity exposure 2 points to 18 percent. Simultaneously, it would cut its domestic bond holdings from 54.8 per cent to 42-44 percent.
An NPS official said that the fund had “no choice” but to look overseas, given that South Korea’s interest rates were low, with the base rate 1.75 percent, and set to fall further, while the economy “won’t likely show signs of any meaningful turnaround for the time being.”
The move would be likely to put further upward pressure on already elevated bond and equity prices elsewhere.
If the NPS buys overseas assets in line with its existing exposures, the bulk of the money will be invested in the U.S. and Europe, rather than its neighboring Asia-Pacific region.
At present, North America accounts for 50.3 percent of the fund’s 60.6 trillion won overseas equity portfolio and Europe 28.4 percent, with Asia-Pacific constituting just 10.4 per cent, Japan 7.3 percent, Latin America 2.9 percent and Africa and the Middle East 0.7 per cent.
Its 92.7 trillion won domestic equity portfolio, which is in line to be cut, is heavily weighted towards the electrical and electronic equipment and transport equipment sectors, with Samsung Electronics, Hyundai Motor and SK Hynix its largest positions.
The U.S. constitutes 33.1 per cent of the NPS’s 20.8tn won overseas fixed income portfolio, with the UK accounting for 8.5 per cent and Japan 7.9 percent. About half the money is invested in government and government-related paper, with just under 40 percent in corporate debt.
Any move to scale down the fund’s 265.7 trillion won domestic bond portfolio would be likely to lead to selling of government bonds, which account for 41.3 percent of this portfolio, and special purpose bonds, which make up a quarter.
Some 11.6 percent of its domestic fixed income portfolio is invested in corporate bonds, 4.4 percent in bank bonds and 6.4 percent in asset-backed securities.
The NPS’s exposure to domestic assets has weighed on its returns in recent years. Its domestic equity portfolio lost 5.5 percent last year, even as its overseas equities returned 9.4 percent. Over the past three years, the annualized return from its domestic equities has been just 1.8 per cent, against 13 percent for its foreign holdings.
The pattern has been similar, if less marked, for fixed income, where domestic bonds returned 6.8 percent last year (and 5.0 per cent annualized over the past three years), against comparative figures of 8.8 percent and 5.9 percent for overseas bonds.
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A view of the NPS headquarter in Jeonju.
