Lee Yeon-woo is a financial journalist at The Korea Times. Her wide range of reporting includes policies, macroeconomics, stock market, companies and even crypto. She is passionate about connecting the dots in Korean finance and making it easier for foreign nationals to understand. Based on her previous experience as a national reporter, she also has a keen interest in social issues within the sector, including gender equality and ESG. Your tips and insights are always appreciated. You can send them to yanu@koreatimes.co.kr.
National Pension Service overhauls portfolio, boosts risky asset allocation to 65%
Minister of Health and Welfare Cho Kyoo-hong, center, speaks at a meeting at the government complex in Seoul, Thursday, where the National Pension Service's fund operation committee decided to introduce a reference portfolio approch. Yonhap
By Lee Yeon-woo
The National Pension Service (NPS) is changing its asset allocation method for the first time in 18 years.
The NPS's decided to introduce a reference portfolio aimed at dismantling barriers between asset classes and promoting flexibility in asset allocation. This initiative includes a strategy to increase the allocation of investments in risky assets to as much as 65 percent.
On Thursday, the NPS' fund operation committee held a meeting at government complex in Seoul, and decided to introduce a reference portfolio approach from 2025.
"In order to increase returns, we will flexibly improve the asset allocation system and smoothly promote investment diversification to stably operate the precious retirement funds of the people," the NPS's Chief Investment Officer Seo Won-joo said.
The method does not predetermine the investment proportions for each asset class, such as stocks, bonds, and alternative investments. Instead, it flexibly adjusts the investment weights according to market conditions.
Until now, the NPS established predetermined target proportions, allowable ranges, and benchmarks for domestic stocks, foreign stocks, domestic bonds, foreign bonds, and alternative investments. If the allocation of assets exceeded the allowable range, the NPS adjusted the investment amounts to realign the proportions or sought approval from the fund committee for any necessary changes.
As the asset allocation was carried out in a compartmentalized manner, the NPS faced limitations in adjusting its portfolio in response to changes in the market environment.
To address this, the NPS aims to simplify the allocation system between asset classes. It will now categorize investments into two main groups: risky assets, which include stocks and alternative investments, and safe assets, which consist of bonds.
While doing so, the NPS decided to increase the proportion of risky assets from the current 56 percent to 65 percent.
Currently, the NPS allocates 40 percent to private equity, 30 percent to real estate, and 30 percent to infrastructure within the alternative investment sector. However, with the introduction of the reference portfolio, these strict proportions will no longer need to be followed.
Market insiders anticipate that fund management returns can improve following this overhaul.
The NPS achieved an average annual positive performance of 4.7 percent from 2013 to 2022. In comparison, during the same period, the national pension funds in Norway, Canada, and the Netherlands achieved 6.7 percent, 11.1 percent, and 5.1 percent annual returns, respectively.
Park Sang-hyun, an analyst at Clepsydra Capital, said the notable increase in risky assets by the NPS aligns closely with a pressing societal issue: extending the sustainability of the NPS fund.
"Internal estimates by the NPS suggest that a mere 1 percent increase in the fund's investment return rate could extend its sustainability by approximately 6 years. Consequently, augmenting the proportion of risky assets is seen as an essential strategy to achieve this goal," Park said through his publications on Smartkarma.