Korean pension funds grapple with equity-bond correlation shifts

As the classical stock-bond correlation has gone, Korean pension funds and insurers are scrambling for ways to safeguard portfolios and deliver performance.
Korean pension funds grapple with equity-bond correlation shifts

Korean asset owners are examining how to capitalise on the recent regime changes in the correlations between public equity and fixed income markets, delegates heard at AsianInvestor’s 16th Institutional Investment Forum Korea in Seoul.

Jun Beomsik
Teachers' Pension

“We have been looking at how we can improve our returns from equity investments over the last year. After the interest rate entered the upward cycle in 2022, we saw some losses in our equity investments,” Jun Beomsik, chief investment officer (CIO) at Teachers’ Pension, told a panel discussion of the forum on June 21.

Moderated by Jang Dong Hun, a senior advisor at law firm Yulchon and member of AsianInvestor’s Editorial Advisory Board, Jun and fellow panellists reflected on the recent shifts in the stock-bond correlation, a key component of portfolio allocation.

Lee Sang Hee

“We are seeing less correlation between the equity and fixed income because of the inflation. The stock markets were expected to have a downturn because of the inflation and higher interest rates, but some still expect the rally to continue, leaving us perplexed,” said Lee Sang Hee, CIO at Military Mutual Aid Association (MMAA).


Widely used by institutional investors to determine strategic asset allocation, the long-term return correlation between equities and fixed income has been broadly negative since the 1990s, meaning these asset classes generally move in opposite directions.

An exception to this inverse relationship occurred in 2022, when both stock and bond markets fell in tandem. This scenario marked the first time ever since 1977 that both equities and bonds experienced negative returns in the same year.

This unwelcome positive correlation was driven largely by a sharp, unexpected increase in interest rates, but the inverse relationship resumed in 2023. Now, the anticipated decline in equity markets seem unlikely, leaving CIOs like MMAA’s Lee with crucial calls to make.

“So instead of looking at the changes in the correlation, we want to make sure that different asset classes maximise their profits or returns,” Lee explained.

MMAA is now setting its sights on total returns of fixed income, focusing on the strategy of holding recently purchased high-interest-rate bonds until maturity.

As 74% of MMAA’s portfolio is invested in alternative investments, Lee also highlighted the importance of allocating capital to private market fund vehicles with a strong vintage year.

“So instead of the diversification effect of fixed income and equities, the vintage management of the alternative is really important,” Lee said.


Hwang Seong Bae
DB Insurance

Insurance companies have a strong preference for fixed income over equities, with the latter asset class making up as little as 1% to 3% of Korean insurers’ portfolios, according to Hwang Seong Bae, CIO at DB Insurance.

“We are less affected by the correlation between equity and fixed income, so we focus more on adjusting our fixed income portfolio,” Hwang said.

With current interest rates staying high, the fixed income market is favourable for DB Insurance and its peers, he added. Still, diversification is key to the insurer. Yet, Hwang prefers to avoid the public equity dilemma.

“There are of course areas where we must achieve excess return. Private equity is an area that we have more focus on, and where we manage our vintage appropriately,” Hwang said.

Despite recent efforts to optimise the equity portfolio at Teachers’ Pension, its CIO Jun’s long-term view on strategic asset allocation holds steady, regardless of the on-again, off-again relationship between equities and fixed income.

“We will maintain our overall investment strategy so that we can secure a good level of returns from our investment portfolio,” he said.

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