NPS goes for its own model of investment

By Cho Jin-seo

Staff reporter

One of the basics of modern finance theory is that the expected return on investment is inversely correlated with its risk ― you cannot pursuit high profit without being exposed to high risk. But the National Pension Service (NPS) is challenging this seemingly impossible mission of high return and low risk. So far, its strategy has worked surprisingly well.

This week, the NPS announced that its total assets have surpassed 300 trillion won ($253 billion). Not only is it the world’s fourth largest pension fund, but is also one of the most stable and profitable performers in the public investment sector.

In 2008, when most of the world’s biggest funds suffered at least 20 percent in asset price devaluation, the NPS defended its assets so they remained almost intact ― it lost only 0.18 percent of the fund in value. The result won the awe of the global investment industry.

Jun Kwang-woo, the chairman of the NPS, says the fund has room to improve further. “We will keep upgrading the mechanism of the fund management into a more advanced one, and strengthen our position as a global player as well as an engine of the domestic capital market,” he said on the occasion of the fund reaching 300 trillion won. “Ultimately, we want to become a state organization that wins the trust of our citizens.”

It is already winning more support from citizens and policy makers in Korea after weathering the global financial crisis well. The total accumulated income since the establishment of the fund is tallied at 122.7 trillion won, meaning the overall rate of return averages 6.61 percent, with a surprisingly low fluctuation. Last year’s return was even better at 10.24 percent. This year, its income from fund investment and other types of portfolio management has marked 12.7 trillion won so far.

This also means that about 30 percent of the fund is made from investments since its inception in 1988.

The high proportion of domestic bonds and equities in its portfolio helped markedly during the crisis, especially when the exchange rate for the Korean won was soaring against the dollar. As the national currency depreciated, it made sense to buy more assets in Korea rather than ones denominated in dollars. Only after the volatility of the exchange rate began to calm down in the second half of last year, has the NPS started to open its wallets overseas.

The careful rebalancing of the portfolio will continue in accordance with the growth of its size. It plans to balance the ratio of bond-equity-other assets to 6-3-1 by 2015.

The success of the NPS investment strategy relies partly on its unique mix in governance structure ― the fund is supervised by the Ministry of Health & Welfare. Its chairman Jun was formerly South Korea’s top financial regulator. The management committee has representatives from various academic, civil and consumer groups, who are in general more conservative and cautious in risk assessment than people in the finance industry.

At the same time, the actual portfolio management is performed by professional asset managers. The NPS has fixed a large part of their compensation schemes in order to eliminate the “agency cost” ― in other words, to align their interest with that of the NPS and its customers.

The managers are motivated not by money but by the pride, respect and the experience they get at the world’s fourth largest pension fund, chairman Jun told The Korea Times in an interview in March.