By Park Hyong-ki
Staff Reporter
The National Pension Service, the country's pension fund operator, plans to increase its equity investment for higher returns, and stop playing it safe by investing a large amount of public money in low-risk assets for stable returns.
The pension fund said its investment in stocks will account for 40 percent of the portfolio by 2012, up from 17.5 percent last year. It expects the fund will accrue to about 420 trillion won within four years.
However, market analysts are skeptical as to whether its ``high risk, high return'' approach is feasible, and will help offset worries over the aging population, which is posing a big financial challenge to the nation.
Some say boosting investment in riskier assets such as stocks is the proper way for the pension fund to accumulate public wealth over the long-term.
However, it works as a double-edged sword ― stock investment does help reap bigger gains than bonds, but it can also make the fund suffer steeper losses.
``There is a limit in accumulating wealth only through investment in fixed-income securities,'' said Hwang Geum-dan, an analyst at Samsung Securities. ``The priority for the pension fund is how it will effectively manage risks associated with stock investment.''
Since its launch in 1988, the fund has mostly invested in bonds, accounting for 80 percent of its portfolio. It aims to reduce its bond investment to 50 percent by 2012.
Through stock investment, the fund managed to lose more than 4 trillion won in the first half of this year.
Kang Sung-won, a researcher of Samsung Economic Research Institute, questioned whether the fund can truly reap high gains by increasing investment in stocks, without considering how the market will change and respond going forward.
``The service went ahead of itself in outlining a bold plan to expand stock investment without giving a proper thought about how markets change really quickly over time,'' Kang said.
Considering the track record performance of the benchmark KOSPI, Kang argued that the stock market was not always bullish. ``Should the stock market steadily grow henceforth, I believe it can achieve its target annual returns of over 7 percent,''' he added.
However, the researcher was negative, saying the pension fund is aiming too high based on too rosy an outlook on stocks.
It should consider possible risk factors such as inflation and market conditions before setting out to be riskier through stock investment.
Kang stressed that inflation on growing liquidity will always remain a risk factor on stock markets, adding that excess liquidity has always added downward pressure on stocks over the years.
Problems such as the Kosdaq tech bubble, the credit card bubble and the housing bubble have been caused by excess liquidity, he said.
``Unless the central bank maintains a hawkish, conservative monetary policy position against inflation, there is a little chance for the fund to steadily reap high returns in the future,'' Kang said.
Its plan is not considered an aggressive investment strategy compared with global pension funds such as Canada Pension Plan Investment Board and California Public Employees Retirement System, whose stock investments account for more than 50 percent of their portfolios.
``The fund is not taking an aggressive approach to stock investment. Rather, its investment mechanism only allows it to hold onto stocks ― mostly blue chips ― over the long-term,'' said Hwang of Samsung Securities.
She remains positive though that investment in stocks by the pension fund will serve as a capital support for the stock market in times of bearish sentiment.
But importantly, analysts cited the need for the pension fund to independently manage its investments without government influence as part of efforts to improve efficiency and gain public trust.
``The most disturbing aspect is that the fund never sought public trust or approval,'' said Lee Cheol-yong, a researcher at LG Economic Research Institute. ``If you want to make more risky bets with public money, isn't it obvious that first you need to gain their trust?''
Although Lee agrees that the fund is moving in the right direction toward high risk, high return from low risk, low return move through bond investment, the pension service needs to beef up its risk management as well as asset management capability before heading off to the danger zone.
Also, Kang of Samsung said that given the country's capital market has not yet fully matured, ``it only raises uncertainty as to whether the fund can effectively practice stock investment for high returns.''
Analysts also mention that the country needs to overhaul the pension service system, and that boosting stock investment alone will not solve its problems at hand.
One of the major problems the fund faces is that by 2060, its coffer is expected to dry up with no money available to pay the elderly after retirement amid a rapidly aging population.
``The government needs to develop other safety net systems, while individuals have to start their retirement plan early through investment products after quickly realizing that pensions can only partially satisfy their financial needs later on,'' said Hwang.