Home bias takes a toll on performance for Korea’s NPS

The South Korean national pension fund has seen domestic investments dragging down returns in 2022, but public pressure has made it hard to neglect the Korean market.
Home bias takes a toll on performance for Korea’s NPS

Given the downturn in the Korean economy, Korea’s National Pension Service (NPS) is seeing its performance suffer — after having more than half of its total portfolio invested in domestic assets.

NPS had an overall negative return of 8% during the first half of 2022. The Korean pension fund’s assets under management (AUM) dropped to W882.7 trillion ($654.2 billion) as of end-June.

By asset class, domestic equity showed the worst internal rate of return (IRR) in the first half, at -19.58%. Overseas equity had a negative 12.59% IRR, whereas domestic and overseas fixed income returned -5.8% and -1.55%, respectively.


The alternative asset class was the only one to achieve a positive return, at 7.25%. However, the annual IRR on the asset at the end of this year is likely to be lower after reflecting fair market value, which is forecast to have plunged due to interest rate hikes.

Also read: NPS curbs public downturn risk with alternatives


As opposed to the Korean sovereign wealth fund Korea Investment Corporation, NPS invests domestically, and on a large scale. As of end June 2022, domestic investments made up 50.1% of the total, with 35.1% in domestic fixed income and 15% in domestic equity. This share does not include additional domestic alternative investments, as all alternatives are pooled across domestic and global.

The target portfolio for 2022 indicates that NPS aims to have 27.8% allocated to global equity, 16.3% to domestic equity, 34.5% to domestic fixed income, 8% to global fixed income, and 13.4% to alternatives.  

The 2026 target portfolio will consist of approximately 50% equities, 35% fixed income, and 15% alternatives, with no specifications on domestic and global shares.


Overall, the large share of domestic assets makes NPS investment performance very dependent on the short- and long-term development of the Korean economy, regardless of its size. For instance, the Kospi index fell heavily overall through the first half of 2022, notwithstanding a recent minor recovery.

As of September 1, the Kospi was down 18.88% for the year to date and down 23.18% since September 1 the previous year. Furthermore, the Kospi is likely to be impacted directly and indirectly by the recent interest rate hikes around the world, including Bank of Korea’s hike of a half a percentage point on July 13.


As AsianInvestor previously reported, NPS is working hard to better its performance, both in general with more alternatives, and specifically with a more active investor approach within equities. Yet, the high allocation to domestic assets does make diversification gains difficult to achieve, as performance becomes heavily reliant on Korea’s economic development.

Also read: How NPS is trying to escape its equity dilemma

The large share of domestic investments can be heavily attributed to how Korean politicians and the general public see the national pension fund as a tool to be used for national purposes, rather than as a means to make the right investments for the best long-term, risk-adjusted returns.

In April 2021, for instance, that notion came into play after news that NPS was a net seller of Korean equities for a record-breaking 48 consecutive trading sessions as of early March 2021, offloading W14 trillion in domestic stocks.

NPS had originally planned to cut its allocation to local stocks to 16.8% of its total portfolio this year from the erstwhile 21%, as part of a longer-term goal to add more overseas assets to raise returns. Instead, NPS bowed to public pressure and widened the permissible investment range of local stocks in its portfolio.

Also read: NPS’s stock target capitulation could come back to bite


The NPS H1 loss came as the US Federal Reserve works to reduce its balance sheet, and global supply chain issues worsen amid the prolonged Russia-Ukraine war, NPS stated. These developments affected market sentiment as well as stocks and bonds that the pension fund owns, it added.

NPS stated that the return rate recovered to a range of -4% as of August 25, according to a preliminary assessment, as market volatility reduced and bond yield hikes slowed.

The pension fund’s first-half loss increased the probability of a negative yearly rate of return. Since the investment management arm’s launch in 1999, the pension giant had shown negative annual returns twice, in 2008 and 2018.

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