Korea’s Pension Fund to Buy More Overseas Stocks, Cut Bonds

South Korea’s National Pension Service, the nation’s biggest investor, plans to allocate more funds to overseas equities as it seeks to boost returns.

The agency, which had 406 trillion won ($360 billion) in assets as of March, will raise the weighting of overseas stocks to 10.5 percent of its assets in 2014, the Ministry of Health and Welfare, which oversees the NPS, said in a statement today. That compares with the 2013 target of 9.3 percent. The fund is keeping its target for domestic equities unchanged at 20 percent and aims to pare domestic bond holdings to 54.2 percent of assets next year from 56.1 percent targeted for 2013.

“It’s inevitable for us to turn to overseas stocks for higher profits as we’re unable to actively invest in domestic equities because we possess” a 6 percent stake of the domestic stock market already, said Lee Hyung Hoon, director of the national pension fund policy division at the health ministry.

Buying more international equities may expose the pension fund to overseas fund flows that have dragged the MSCI Emerging Markets Index by 10 percent through yesterday from May 22. That’s the day when U.S. Federal Reserve Chairman Ben S. Bernanke said the central bank could scale back asset purchases if it’s confident in sustained economic improvement.

South Korea’s Kospi index sank 5.6 percent in that time. The benchmark gauge added 0.4 percent at the close in Seoul after a three-day, 2.6 percent slump. It trades for 8.6 times projected 12-month profit, compared with the developing-nation gauge’s 9.8 times, data compiled by Bloomberg show.

Fund Outflows

Lower appetite for risky assets prompted international investors to sell a net $2.8 billion of South Korean equities this month, the data show. Net sales of $867 million yesterday were the most since August 2011.

The NPS aims to raise the proportion of alternative investments including infrastructure, property and private equity to 11.3 percent of assets in 2014, according to today’s statement. That’s up from the 10.6 percent objective for this year. The fund plans to keep its target for overseas bonds unchanged at 4 percent.

“Increasing the portion of foreign equities looks to be an effort carried out to diversify the agency’s investment portfolio,” Han Sang Soo, a Seoul-based fund manager at Samsung Asset Management Co., which oversees $114 billion. “The fact that it has cut the portion of domestic bonds and boosted the figure in alternative investment indicates that we may see a rise in the country’s interest rate in the future.”

Won, Yen

The central bank left its benchmark interest rate unchanged at 2.5 percent yesterday after a surprise cut in May aimed at boosting an economy hit by a drop in the yen. Japan’s currency has slumped about 17 percent against the won since the start of October, hurting the competitiveness of South Korean exporters versus Japanese rivals.

South Korea’s economy grew 0.8 percent in the first quarter from the previous three months as the government front-loaded spending. While the economy is on a sustained recovery trend, heightened volatility of the Japanese yen poses a risk, the Bank of Korea said in a June 13 statement.

The NPS cut on May 29 its five-year target for investment returns to account for slowing growth in an economy that grew last year at the slowest pace since 2009. The government lowered its forecast for 2013 gross domestic product on March 29 to 2.3 percent from 3 percent.

Japanese Pensions

The South Korean pension fund’s latest five-year asset allocation plan calls for the agency to increase stocks to more than 30 percent of assets by the end of 2018 from 26.7 percent in 2012, according to a May 29 statement from the Ministry of Health & Welfare. The fund is targeting returns on stock, bond and property investments of 6.1 percent for 2014-2018, down from 6.6 percent announced last year for 2013-2017, according to that statement.

The NPS is targeting bonds to take up less than 60 percent of assets by 2018 from 64.8 percent last year, the May statement showed. The South Korean fund’s plan to buy more stocks and reduce bonds follow a similar move by Japan’s public pension fund to favor higher-yielding assets as it prepares to fund retirements in the world’s most elderly population.

The proportion of assets held by the Government Pension Investment Fund in Japanese bonds will be cut to 60 percent from 67 percent, the nation’s health ministry said on June 7. The weighting of local shares will be increased to 12 percent from 11 percent currently, the ministry said.

(Updates with closing prices from fifth paragraph.)
    Before it's here, it's on the Bloomberg Terminal. LEARN MORE