NPS to boost overseas equities by 2021; trimming portion of domestic portfolios

  • 2016-05-18

– Overseas portfolios seen to climb to over 35% by 2021 vs. 24.3% at end-2015

– Domestic portfolios seen to drop to 65% or below vs. 75.7% at end-2015

– Average returns on domestic equities miss overall portfolio performance in past five years

– Targets 5% annual return on investment portfolios under 5-year asset allocation plan

 

By Dong Wook Jwa

The National Pension Service (NPS) will increase the portion of overseas equities in its investment assets by 2021, the welfare ministry said on May 16, in a move to diversify away from the range-bound domestic stock markets, with yields on the country’s government bonds hovering around record lows.

The announcement also comes as the $440 billion pension fund has been facing criticism over its growing influence in domestic equities markets, although the swelling asset size at the pension fund means its holdings in South Korea’s $1.3 trillion stock markets should increase in value.

The fund management committee of the pension fund endorsed the mid-term asset allocation plan for the period of 2017 to 2021 on May 16, which also included a cut in the portion of domestic bonds, according to the press release of the welfare ministry which oversees the NPS.

Details of the mid-term asset allocation plan (in percentage terms).

End-2015 End-2017 End-2021
Domestic stocks 18.6 19.2 ± 20
bonds 52.8 49.5 ± 40
Overseas stocks 13.7 15.4 ± 25
bonds 4.3 4.0 ± 5
Alternative assets 10.7 11.9 + 10

(Source: the Ministry of Health and Welfare)

The committee sets a 5% annual return target for the next five years, based on real economic growth and inflation forecasts.

To achieve the goal, the committee adjusted the target weight of each asset class: equities with around 45%, bonds with around 45% and alternative assets with over 10%. In accordance with the plan, the portion of overseas portfolios will expand to 35% or above by the end of 2021, from 24.3% at end-2015.

 

However, considering the continuous expansion in the NPS’ assets which are estimated to peak in 2043, the value of its domestic equities holdings is estimated to swell to 163 trillion won ($140 billion) by 2021, from 94.9 trillion won at end-2015. Market pundits say that even without a fresh capital injection into local stock markets, economic growth and inflation would lift the value of the NPS’ domestic equities holdings.

By the end of next year, NPS’ investment assets are expected to climb to 608.5 trillion won, according to the press release, compared with 520 trillion won as of end-February of this year.

WHALE IN THE POND; OUTPACES GROWTH IN KOREAN STOCK MARKET CAP

The planned increase in the portion of foreign equities may indicate a “great shift” for the NPS in a decade, since it introduced a five-year strategic asset allocation plan in 2006. Up to now, NPS has stuck to the strategy of expanding the portion of domestic equities, while slashing that of domestic bonds.

The Korean stock markets-oriented investment strategy, which gained the NPS the nickname of “a whale in the pond,” was aimed at buttressing local stock markets and the domestic economy. However, tumbling returns from lackluster domestic IPO markets and low interest rates weakened the justification of holding onto South Korean equities. Also, NPS’ stock portfolios heavily weighted towards Korean equities run against the investment principle of diversification: “Don’t put all your eggs in one basket.”

According to the NPS, its domestic equities portfolios had ballooned nearly five times in value to 94.9 trillion won at the end of last year, from 20.7 trillion won at end-2006. During the same period, the portion of domestic equities increased to 18.6% of its total assets, compared with 10.9%. However, the market capitalization of South Korea’s listed companies had risen by just 1.9 times to 1,445 trillion won from 777 trillion won.

Likewise, the weight of the NPS’ domestic equities holding in South Korean stock market value had climbed to 6.6% at the end of last year, from 2.6% at end-2006. The pension fund holds a more than 5% stake in 260 companies in the country, and more than 10% of 60-odd firms.

With domestic stock markets running out of steam, NPS saw returns on investment portfolios sliding. Further, its investment assets focused on domestic stock markets have entailed higher risks. The average return on the NPS’ domestic stock holdings swung to negative 0.14% in the past five years, below its overall investment return of 4.66%. Of domestic stock portfolios at the pension fund, the country’s top four business groups account for 52.5%.

By comparison, pension funds in developed countries such as the United States, Canada and the Netherlands put less than 10% of their investment assets into equities and bonds in home markets. For the NPS, domestic equities and bonds represented 75% of investment portfolios as of end-2015.

NPS reportedly plans to maintain its weight in South Korean stock markets at 6.6% in terms of market capitalization. It has been increasing its domestic stock holdings by an average 8 trillion won a year, or 11.7%, over the past five years.

leftking@hankyung.com