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| National Pension Service (NPS) headquarters in Jeonju, North Jeolla Province / Coutesy of NPS |
NPS' asset allocation target stunts local stock market's further growth
By Anna J. Park
As the National Pension Service (NPS) maintains its net-selling position on Korean stocks, Tuesday, for the record-breaking 48th consecutive trading session, voices of criticism and questions have arisen regarding the moves by Korea's largest institutional investor.
In its 48 days of net selling since December, the NPS sold Korean stocks worth 14 trillion won, mostly blue-chip stocks listed on the nation's benchmark KOSPI. For instance, the pension fund's stake in Samsung Electronics ― Korea's top market cap stock ― decreased to 9.99 percent as of this month, falling under 10 percent for the first time since it exceeded the 10 percent mark at the end of 2018.
Some retail investors are pointing their fingers at the NPS, saying that the pension operator holding more than 840 trillion won ($735 billion) in funds was the main culprit behind the KOSPI index falling below the 3,000 mark. Some posted petitions on the Cheong Wa Dae website, urging the financial authority to prevent the NPS from continuing its net-selling of local stocks.
"By net-selling local stocks, the NPS turns a blind eye to Korean companies' growth potentials as well as retail investors' hopes for a positive future," one of the petitions read.
Regarding the outcries from local investors, market watchers attributed the NPS' selling mainly to its asset allocation target, which shows that domestic stocks should account for around 16.8 percent of the pension fund's assets, meaning that another 24 trillion won worth of Korean stocks should be sold to meet the target. The NPS plans to reduce its share further to 15 percent by 2023, while it increases its share of foreign stocks up to 30 percent.
Self-fulfilling prophecy trap?
While it is totally understandable that the NPS has total freedom and independence in it management of investing to maximize profits for the public's retirement pensions, the NPS' asset allocation target seems to reflect a self-deprecating attitude towards domestic stock markets.
Supporters of the NPS' position claim that a 15 percent asset allocation target for Korean stocks is still high, given that the Korean stock market's market cap only accounts for about 2 percent of the global capital market.
However, if the NPS sets its long-term asset allocation target based on the current level of the country's GDP, it would only work as a negative self-fulling prophecy to the Korean capital market, as the NPS acts to sell off local stocks based on its predetermined notions about the Korean stock market's growth limit whenever local stocks' values exceed the pre-fixed level.
The NPS' inflexible asset allocation target is more questionable when considering the national pension operator recorded an annual return of 34.89 percent from Korean stocks last year, while it logged only a 10.76 percent returns from foreign stocks. Historically, the foreign stocks' annual returns have been a bit higher at 10.23 percent as opposed to domestic stocks' 8.99 percent, yet past records should not determine the asset allocation target for the next five years.
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