Chief Investment Officer Kang Myoung-wook of National Pension Service.

The National Pension Service (NPS) plans to expand its investments in China and India, especially in government bonds in China, CIO Kang Myoun-wook of the national retirement fund said in an interview with Bloomberg News.

Explaining the reasons for the NPS plan to boost its investments in those two Asian giants, the CIO said he thinks the two countries are considered to yield the best returns on foreign investments among Asian countries. Kang said the NPS plans to boost its investments in overseas bonds to 24.3 trillion won by the end of next year by investing 2.4 trillion won more in overseas bonds in 2016. The additional investments would go mostly to India and China, as NPS considers the two countries to yield high returns for its investments.

China, Kang noted, issues huge amounts of state bonds, thus there is plenty go around for investors to buy up those bonds and still offer high yields.

The NPS selected the two countries to boost returns from bonds, as bonds in Korea only pays 1.4 percent in annual interest. Last year the interest on bonds fell to 1.36 percent, the lowest in recent years, Kang noted. 

The Korea Times reported that the NPS would raise its allocation to overseas equities 4 percentage points to 20 per cent by 2020, while cutting its domestic equity exposure 2 points to 18 per cent. Simultaneously, it would cut its domestic bond holdings from 54.8 per cent to 42-44 per cent.

The newspaper quoted an unnamed NPS official as saying 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 per cent, 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 per cent of the fund’s 60.6 trillion won overseas equity portfolio and Europe 28.4 per cent, with Asia-Pacific constituting just 10.4 per cent, Japan 7.3 per cent, Latin America 2.9 per cent 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 toward the electrical and electronic equipment and transport equipment sectors. 

The US constitutes 33.1 per cent of the NPS’s 20.8 trillion won overseas fixed income portfolio, with the U.K. accounting for 8.5 per cent and Japan 7.9 per cent. About half the money is invested in government and government-related paper, with just under 40 per cent in corporate debt.

Any move to scale down the fund’s 265.7 trillion won domestic bond portfolio would likely to lead to the sale of government bonds, which account for 41.3 per cent of this portfolio, and special purpose bonds, which make up a quarter.

Some 11.6 per cent of its domestic fixed income portfolio is invested in corporate bonds, 4.4 per cent in bank bonds and 6.4 per cent 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 per cent last year, even as its overseas equities returned 9.4 per cent. Over the past three years, the annualized return from its domestic equities has been just 1.8 per cent, against 13 per cent for its foreign holdings.

A view of the headquarters of NPS in Jeonju, North Jeolla Province.(Photos: NPS)