The National Pension Service will set up teams in its overseas offices to directly handle active investments in traditional assets such as equities and bonds. This transition is expected to reduce external management fees by nearly 691.5 billion won ($579 million).
Until now, the 725 trillion won ($630 billion) pension fund’s internal team had focused on passive investments for overseas equities while its active investments were all handled by external fund managers.
In 2019, the pension fund’s investment portfolio for overseas traditional assets included 36.4% in passive investments directly managed by the NPS, 4.3% in passive investments entrusted to external agencies, and 59.3% in active investments which were all managed by external agencies.
This is expected to change because the NPS is keen on directly managing active investments given that it is in a period of aggressive investment until 2029 with premium incomes against payouts. Through this, the NPS is hoping to enhance the capability of active investments which is the source of alpha and reduce external management fees.
On July 31, the pension fund announced that it will add 160 additional employees over four years to fortify its overseas operations. This includes expanding the scope of responsibilities and operations for overseas offices which had functioned merely as liaison offices where main duties included local market research and networking. Going forward, it will set up an active investment team in its overseas offices which will help to lessen their dependence on external agencies and shore up the direct management of equity investments.
In 2021, the NPS plans to divide up the overseas securities division into overseas equities and overseas bonds teams and set up a lower sub-team to aid the sharp growth of overseas securities.
The new active investment team will review non-financial factors such as ESG (environmental, social, governance) as well as financial factors when investing in overseas equities.
The pension fund will also separate overseas bonds into detailed asset classes. Overseas bonds will be divided into ‘safe’ assets such as government and public bonds, and ‘higher-yielding’ assets such as credit-types. If a financial crisis occurs then safe assets will be liquidated to purchase undervalued risk assets.
The NPS estimates that the external management portion of overseas traditional assets will drop from the 60% range to 35%.
NATIONAL PENSION FUND EMPOWERS OVERSEAS OFFICES
Overseas offices will internally handle products that require local management such as emerging-market bonds, regional credit, and US mortgage-backed securities. The pension fund will also implement new strategies such as quant trading among others when investing in bonds.
The NPS currently operates overseas offices in New York, London, and Singapore. There are 41 overseas employees which will increase up to 201 employees by 2024. The pension fund’s current staffing is about one-tenth of the Canada Pension Plan Investment Board which operates about $409 billion assets under management, over half of the National Pension Service.
The pension fund invested 256.8 trillion won into overseas assets in 2019. It will continue to increase its overseas investments to enhance long-term returns and stabilize the pension fund’s finances.
By Jung-hwan Hwang and Chang Jae Yoo
<Edited by Danbee Lee>