Covid-19 pushing Korean pensions into local assets

Travel lockdowns have severely impacted the investors' ability to keep adding to their historical interest, especially in overseas alternative assets.
Covid-19 pushing Korean pensions into local assets

Korean pension funds look set to increasingly shift new asset inflows into domestic markets if the lockdowns caused by the Covid-19 pandemic continue to restrict their ability perform due diligence on overseas assets.

The funds receive net inflows of new assets each year as workers set aside some of their salaries for retirement. However, the pandemic has curtailed investment teams from travelling abroad and prevented specialists of many international fund from visiting Korea since January.

This is making it particularly difficult for the pension funds to invest more into alternative assets such as private equity, private debt, real estate and infrastructure, which require long term capital commitments of up to 10 years.

“South Korean pensions have been increasing their overseas exposure during the past four to five years, especially in the alternative investment area. However, because of the pandemic, due diligence, meeting between GPs (general partners) and LPs (limited partners) have been postponed or stopped," said Jang Dong-hun, the chief investment officer of the Public Officials Benefit Association (Poba).

Jang Dong-hun, Poba

“If, despite our best effort, we can't satisfy our due diligence process or meet with GPs and LPs, we will try to seek out domestic opportunities that can meet our return targets,” Jang told AsianInvestor. He noted that this is effectively the pension fund’s Plan B, to be conducted only if travel restrictions remain for an extended period.

Poba had 30% of its W14.3 trillion ($11.6 billion) in assets under management (AUM) in overseas alternative assets at the end of 2019, and the fund had planned to increase that to 35.8% by the end this year. Its total overseas allocation to all asset classes stood at 51.2%, excluding cash and contributions from its members.


Before the pandemic outbreak, South Korean pensions were among the most active global alternative assets investors. According to alternative asset data provider Preqin, the country’s pension funds have almost doubled their overall infrastructure allocations from 4.1% in 2017 to 7.9% this year.

Among the recent transactions was National Pension Service of Korea's joint acquisition with APG Asset Management and Swiss Life Asset Managers of an 81% stake in Portuguese toll road operator, which was announced last month. That deal was probably initiated a long time before lockdowns began, said an industry expert who declined to be named.

However, the pension funds' allocation to private equity and real estate has slightly dropped in recent years, with the former falling from 9.7% three years ago to 9.2% and the latter dropping 21.3% to 17.2% over the same period.

However, more was likely to come. NPS's CIO Ahn Hyo-joon told an audience at an AsianInvestor conference in April 2019 that the W738 trillion ($598.54 trillion) fund's wanted to raise its alternatives asset allocation to 15% by 2023. It stood at 11.9% at the end of February, meaning NPS would need to make $18 billion in additional investments to reach this target, based on current its current AUM. 

While Korean pension funds’ focus on alternative assets leaves them particularly affected by the lockdown, the difficulty of offshore investing is being felt across much of Asia. Alex Kim, the managing director of Aberdeen Standard Investments, said many Asian institutional investors have virtually halted overseas investments in favour of monitoring, reviewing and assessing current holdings; effectively taking a wait-and-see approach. Instead, they are beginning to focus new  allocation plans more on local markets.

“We have seen inquiries into fixed income strategies for public markets and distressed credit for private markets, but most allocations seem towards domestic asset classes both for public and private markets. The inability to perform due diligence or travel, to see managers or assets, is a challenge,” he told AsianInvestor.

Sally Choo, head of South Asia institutional coverage at Amundi, agreed, adding that she has seen an increased interest in passive investing among asset owners. This might relate to a defensive mindset as they wait for more clarity on how international markets will perform. 


Across the world, companies and investors alike are focusing on when countries will start to ease lockdowns and travel restrictions. At the same time, concerns are rising that a second wave of Covid-19 infections could arise in countries that ease their lockdowns too soon. 

That uncertainty is being reflected in the continuing volatility in stock prices. While the S&P 500 index lost 20% in the first quarter of this year, equity prices have mostly rebounded from their record lows in March. This happened despite countries reporting very weak GDP growth numbers in the first quarter of this year.

The positive news for long-term investors such as pension funds is that current conditions still offer them opportunities to selectively buy assets at low historical valuations.

There is divergence between the real economy and asset prices, but institutional investors with a long-term horizon can still take advantage of the situation

“For the time being, there is a divergence between the real economy and asset prices, but I think institutional investors with a long-term horizon can still take advantage of the situation,” Jang said.  

However, this doesn't mean Poba or its peers will jump into overseas public equities and bonds. Jang noted that the fund's absolute return strategy would discourage it from doing so. "If we increase our exposure pretty dramatically in public equity or fixed income securities, then we are more exposed to market swings and volatility.”

Another option is for Poba to hold more cash, particularly if local investment opportunities could not meet its annual target return of around 5%. “However, we can't be holding onto cash for too long,” Jang added.

Indeed, with all asset classes struggling to achieve decent returns. Jang said that means all investors – including pension funds – will need to adjust their long-term expected returns lower.

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