Pension Fund Taps Won Rally to Shop Abroad as Yields Slumpby and
Government Employees Pension Service buys properties overseas
South Korea’s currency is Asia’s top performer since June 30
One of South Korea’s biggest retirement funds is taking advantage of a stronger won to boost returns by snapping up real estate overseas and trimming lower-yielding domestic bonds.
The Government Employees Pension Service is looking at properties in the U.S. after investing in buildings in Australia and Belgium, according to its chief investment officer. The won’s 3.4 percent gain versus the dollar this quarter is the best performance in Asia, and the currency is up 7.3 percent in the past year, second only to the yen. That’s a boon for GEPS as it seeks to increase overseas investments to 20 percent of total assets this year, from 16 percent, and to 30 percent in five years.
“We have to go overseas when the won is strengthening,” Choi Young Gwon, who oversees the fund’s 5.4 trillion won ($4.8 billion) of assets, said in an interview in Seoul.
GEPS follows the nation’s largest retirement vehicles, the National Pension Service and Korea Teachers Pension, in building a diverse global portfolio to meet higher payouts to an aging population that curbs potential economic growth. The fund’s target of a 4.5 percent return over five years has become harder to achieve with domestic bonds yielding less than 1.5 percent, boosting the allure of alternatives such as real estate.
“When your target return is set and expected return is measured, all seems to point to alternative investments,” Choi said. “Between domestic and offshore alternatives, I prefer offshore ones as domestic options are limited and harder to exit.”
While a strategist survey puts the won 4.4 percent weaker by year-end at 1,165 per dollar, ING Groep NV -- the most-accurate forecaster in Bloomberg’s latest rankings for the currency -- sees little more than a 1 percent slide to 1,130. A smaller drop would help pension funds continue their overseas acquisitions. The won rose 0.2 percent to 1,113.70 as of the 3 p.m. close in Seoul.
The country’s Statistics Office estimates the proportion of South Koreans aged 65 and above will climb from 13 percent to 40 percent by 2060. Asia’s fourth-largest economy’s potential growth rate will decline to 2 percent between 2026 and 2030, from about 2.7 percent now, according to the Hyundai Research Institute, a private think tank.
South Korea’s sovereign bond yields are near record lows reached in July after a prolonged export slump prompted the central bank to cut its policy rate to an unprecedented 1.25 percent in June. Sixteen of 24 economists surveyed by Bloomberg predict another reduction by December. The nation’s 10-year notes yield 1.42 percent compared with 2.71 percent in China and 7.12 percent in India. In Asia, only Hong Kong, Taiwan and Japan offer lower yields.
“Because interest rates are so low, it is hard to achieve satisfactory returns from investing in bonds,” said Kim Byung Duck, senior fellow at the Korea Institute of Finance in Seoul. “That is why pension funds are looking overseas and to alternative assets to diversify their portfolios and boost returns.”
GEPS invested 50 billion won in a building in Canberra in April, following a similar purchase in Melbourne last year, according to Choi. Last month, it paid 50 billion won for a stake in the Astro Tower in Brussels. Alternative investments are expected to account for 24 percent of its assets by 2021, 60 percent of which would be overseas and the rest local, he said.
Domestic bonds are “a bit pricey,” Choi said, adding that their share of the fund’s assets will decline to 41 percent by the year-end from 44 percent now. The proportion has dropped from 49.4 percent at the end of 2013. The fund favors longer-dated securities and is looking forward to the proposed sale of South Korea’s maiden 50-year notes, he said.
The National Pension Service aims to pump some of its 533 trillion won of assets into China, Chief Investment Officer Kang Myoun Wook said this month, adding that it’s also looking at putting money into India, where yields are the highest among major Asian nations. NPS said in May that it plans to boost its holdings of foreign securities and alternative assets to more than 35 percent by 2021 from 24.3 percent in 2015. Korea Teachers Pension said last year it will cut local bond holdings to allow it to diversify by adding overseas equities, bonds and alternative assets such as real estate.
“Every pension fund CIO is probably thinking hard about the same thing: how to achieve the target return in today’s low interest-rate environment,” Choi from GEPS said. “The volume of longer-term investments will rise, and asset allocation rather than individual stock selections will become more important.”