Korea National Pension Service Set to Stop Currency Hedging

  • To cut hedging target for overseas bond investments in phases
  • Revisions are aimed at preventing an increase in costs

South Korea’s National Pension Service will stop hedging its overseas bond investments against currency fluctuations by the end of 2018 as the country’s biggest investor looks to cut costs.

The NPS’ hedging target rate will halve to 50 percent by the end of 2017 and to zero percent by the end of next 12 months, according to a statement from the Ministry of Health and Welfare Thursday, which oversees the fund. The move comes as the NPS, which doesn’t hedge its stock investments, is seeking to boost the allocation of overseas assets in its portfolio.

The revision is “to prevent an increase in costs from large currency-swap trades,” the ministry said. South Korea’s won has weakened 5.9 percent versus the dollar in 2015, heading for a second straight annual decline.

"The influence of NPS in the currency market will only grow as the fund increasingly looks for overseas investments,” said Jeon Seung Ji, a currency analyst at Samsung Futures Inc. in Seoul. “Lower hedge ratio will boost demand for the dollar in the spot market while reducing trades via currency swaps.”

The public fund will also cut the ratio of overseas equities managed by external asset managers to 65 percent-85 percent starting January, from about 70-90 percent, to save on costs, according to Thursday’s statement. The Kospi Index of shares has climbed 3.9 percent in 2015, halting a two-year drop.

The NPS, which had 500 trillion won ($427.6 billion) in assets at the end of September, said in June it will increase non-Korean holdings to more than 30 percent by the end of 2020, compared with 21.9 percent last year. That’s in line with government plans to boost outbound investments to support a weaker currency and aid export competitiveness. The finance ministry announced measures in June including tax benefits for funds buying global equities and looser regulations on insurers’ currency hedging and foreign debt purchases.

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