Korean pension fund seeks foreign help with alternatives

May 10, 2010

The Government Employees Pension Service is preparing to expand its allocation to international equities and alternative investments, while also boosting cash levels.

The Government Employees Pension Service (GEPS) of Korea is seeking foreign partners to collaborate on asset management and training for its fund management professionals, says Kevin Kwon, chief investment officer at GEPS's fund management division.

GEPS is one of four Korean public pension entities, along with National Pension Service (NPS), Korea Teachers Pension Fund (KTPF), and the Military Mutual Aid Association (MMAA). It was founded in 1960 to provide annuities and other benefits to civil servants. Its present structure dates back to 1982 and it is administered by the Ministry of Public Administration and Security.

GEPS's asset size was around $3.5 billion of as the end of 2009 and its portfolio earned about 8.5% in that year, which was 1.8% more than its target return. The largest asset allocation was in domestic fixed income securities at 64%, followed by alternative investment areas including both domestic and global investments (17.7%). Its domestic equity investments weight was around 15.6%.

Kwon says that, in 2010, GEPS plans to increase equity investments and to lower its allocation to bonds. GEPS is focused on controlling its reserves, because it needs to maintain a reasonable amount of cash reserves for paying its members their monthly pension benefits. Therefore it needs to invest a portion of assets in liquid and short-term securities, which in 2009 was a drag on investment performance. Its target return in 2010 is around 8%.

In order to achieve the goal, Kwon says they will consider a variety of asset classes to invest in, including commodities, global securities, Korean paper and private-equity funds (particularly for distressed debt and M&A opportunities). At the same time, he says it will consider new types of ETF investments, mezzanine opportunities, and expanding its outsourcing platform.

GEPS plans to expand its foreign-investment portfolio, particularly to emerging-market equities and commodity funds. The organisation is now in the process of preparing the operations platform, risk-management structure and finding the right staff to enable this expansion.

All in all, Kevin says that this will be only possible by working together with reputable and capable foreign investment companies and they will begin to look for such companies as partners. He says that starting May, the funds management division will take serious action towards achieving this goal.

There is a history of Korean institutions trying to forge such strategic relationships, although the track record hasn't yielded any obvious successes. Among those investors that maintain such deals are the National Pension Service and Korea Teachers Pension Fund.