Korea’s National Pension Service (NPS), with W712.1 trillion ($615.8 billion) of assets under management (AUM) as of end-October 2019, has taken another step to strengthen its alternatives investments efforts overseas.
At the start of the year, the pension service restructured its alternatives division, abolishing domestic teams under the three investment divisions of private equity, real estate and infrastructure. NPS has instead merged domestic alternatives investment professionals into the Asia-Pacific team and split each division into Asia-Pacific, Europe and US teams.
The step has been taken to spur efficiency, according to a source familiar with NPS’s investment strategy who spoke under condition of anonymity. Future investments will primarily be done overseas, as the domestic alternatives portfolio can only grow marginally out of diversification risk concerns.
“NPS will now be more focused into each region globally, and be more efficient in terms of factors like execution time on deals and utilisation of resources,” the source told AsianInvestor.
“NPS would like to decrease the home bias in its alternatives portfolio and move into a 'global portfolio' strategy as the allocation to alternatives dramatically increases.”
Alternatives investments are seen as an increasingly important sub-strategy to counter a relatively low-interest rate environment for fixed income and to decrease volatility from the less predictable equity markets. For (the financial year) 2019 so far, NPS registered an 8.32% investment return as of end-October 2019.
NPS would like to decrease the home bias in its alternatives portfolio and move into a 'global portfolio' strategy
While the yield for alternatives investments came to 5.84%, NPS chalked up a 5.71% investment return from the local stock market and a 24.28% yield from investments in overseas stocks. The fund's return rates from investments in domestic and foreign bonds reached 3.06% and 13.04%, respectively,
The preliminary positive results for 2019 followed a negative 0.92% return on average in 2018 with poor performance from equities especially. The success story, however, was its alternatives investments portfolio which made an annualised return of 11.8%.
NPS’s alternatives portfolio stood at W80.97 trillion as of end-October 2019, making up 11.4% of the total AUM. Since the end of 2014, the alternatives AUM has increased 73.56% from W46.66 trillion.
Alternatives investments are targeted to make up 15% of total AUM by the end of 2023. The target is a part of NPS’s current five-year plan, chief investment officer (CIO) Ahn Hyo-joon told delegates at AsianInvestor’s 13th Institutional Investment Forum Korea, held on April 10, 2019, in Seoul.
The absolute allocation targets for alternatives has increased from 2019 to 2020 as a share of AUM, the source said, without confirming the exact targets.
Investments will be made according to the current regional allocations. The split of the global alternatives portfolio is around 40% to 50% to the US, 20% to 25% to Europe and 20% to 25% for Asia-Pacific for each division, the source said.
“With the Korea portfolios now merged into the Asia bucket, the Asia portion increased its share of the portfolio. NPS will continue to manage the portfolio according to the long-term targets,” the source added.
To increase investment efforts, NPS hopes and plans to increase dedicated alternatives staff in the three regional overseas offices in Asia (Singapore) North America (New York) and Europe (London). It is, however, related to budgets which are determined by Korea Ministry of Finance so nothing is certain, the source said.
NPS has also renamed the private equity investment division the “private equity and venture investment” division, which highlights the presence of venture capital investments. For instance, NPS said on December 4, 2019 that it had picked five investment houses and earmarked some W200 billion gained in a venture fund for its investment in start-ups.
The Korean state pension fund is generally not looking to move into high risk, high return investments, the source said.
Although high demand has lowered investment yields in private markets, especially for real assets such as real estate and infrastructure, NPS has acknowledged the “challenging market situations” and lowered return expectations, according to the source.
Instead, it is currently aiming to make alternatives investments that are defensive in nature, which means that returns aim not to be affected by economic cycles.
“NPS plans to stick to core investments with income-driven returns, and balance those with non-core strategic bespoke investments depending on the circumstance of each of those opportunities,” the source said.
To carry out this strategy, NPS is seeking more co-investments to increase returns when possible. The pension fund is also keen on club deals with other large asset owners, alongside asset managers as operational partners, according to the source.
Two recent infrastructure investments bear witness to this trend. In December 2019, it was announced that NPS had invested into two LNG (liquid natural gas) midstream projects in North America as a part of club deals of infrastructure funds run by KKR and Blackstone, respectively.
INCREASED CIO FOCUS
The private equity, real estate and infrastructure divisions are headed by Choe Hyung Don, Scott Kim and Kim Jee Yeon, respectively. They all report directly to NPS’s CIO, Ahn Hyo-joon.
On December 18, NPS announced that it had created three senior manager positions for strategy, risk management and back office under Ahn. As CIO, he will focus only on investment for the pension fund, handing over control of investment strategy, risk management and back office to the new heads.
The structure change within the three alternative divisions does not correlate with the new senior management structure supporting the CIO, according to the source. Still, it is intended to allow an increasing focus on investments.
“The new senior management structure unloads some operational burdens of the CIO and ables him to focus more on investment-related tasks instead,” the source said.