NPS seeks more risk with asset allocation shake-up

The Korean national pension fund is embracing a new investment approach, allocating capital across asset classes to boost returns. The fund is prioritising riskier assets, such as equities and alternatives, as evidenced by a recent $1.1 billion external mandate that exemplifies this strategic shift.
NPS seeks more risk with asset allocation shake-up

Higher allocation to equity markets is expected as Korea’s National Pension Service (NPS) is changing its core asset allocation method for the first time in 18 years, including a strategy to increase the allocation of investments in risky assets to as much as 65% with a new reference portfolio, according to a May 2 announcement.

The increase in risky assets will also include alternative investment. Up until now, NPS has been somewhat limited for investing in private markets, including real estate, infrastructure and hedge funds, according to a Hong Kong-based investment consultant advising Korean asset owners.

"NPS has researched related pros and cons over the last couple of years by referring to peers such as CPPIB and GIC. We believe they’re aiming to enjoy the benefits from the changes based on the case studies," an investment consultant told AsianInvestor, on condition of not being named.

To improve investment performance and postpone the fund's depletion, now projected for 2055 due to a rapidly aging population, the pension fund is raising its allocation to risky assets from the current 56% and diversifying across asset classes in the new reference portfolio.

"Internal estimates by the NPS suggest that a mere 1% increase in the fund's investment return rate could extend its sustainability by approximately 6 years. Consequently, augmenting the proportion of risky assets is seen as an essential strategy to achieve this goal," Park Sang-hyun, an analyst at Clepsydra Capital, said in a comment.

Overseas equity markets are expected to see increased allocations as the world’s third-largest pension fund has recently launched an increase overseas share of total AUM, but the domestic equity market is also likely to benefit, according to Park and other analysts.

On April 26, NPS also announced that it will hire external managers based in Korea for W1.55 trillion ($1.1 billion) worth of investments in private equity funds, credit and distressed securities and venture funds for 2024.

The lion’s share, W1 trillion, will be assigned to private equity investments, 25% more than last year’s amount.

As of February 29, NPS had an AUM of W 1,069.7 trillion ($787 billion).


The new reference portfolio does not set the investment proportions for each asset class, such as stocks, bonds, and alternative investments. Instead, it is meant to flexibly adjusts the investment weights according to market conditions.

"Going forward, the fund will keep the ratio of risky assets at 65% in its strategic asset allocations and invest in various kinds of alternative assets in a swift manner within the ratio to raise investment earnings," the Ministry of Health and Welfare (MHW), announced after the May 2 meeting to review the fund's investment strategy.

Although a predominant focus on private equity, the recently launched W1.55 trillion domestic mandate for external managers fits that cross-asset classes approach.

It is the largest-ever external investment commitment by NPS that will add distressed securities to its external portfolio for the first time with an investment of W350 billion this year.

"From the flexibility of investments based on the new approach, their investments will be more diversified and the chances for the interaction with external managers will be also increasing," the Hong Kong-based investment consultant said.

The Korean pension fund will appoint up to three external managers for investments in bank credit, convertible bonds (CB), bonds with warranty (BW), redeemable convertible preferred shares (RCPS) and exchangeable bonds (EB), which should make up more than 80% of each fund.


In June of last year, the NPS announced its 2024-2028 asset allocation plan with more alternative investments but less fixed income investments as part of its long-term goal to boost profitability.

The Hong Kong-based investment consultant expects that the new reference portfolio will first be utilised for increasing alternative investmentst.

"Issues with the alternative assets portfolio will be one of the parts that they need to sort out. We believe NPS will expand the integration to other areas after the progress of alternative investments," the investment consultant said.

As of February 29, it has allocated around 46.7% of its total assets in equities, 37% in fixed income and 16% in alternative investments.

Within its alternative investments, NPS allocates 40% to private equity, 30% to real estate, and 30% to infrastructure. However, with the introduction of the reference portfolio, these strict proportions will no longer need to be followed.


NPS announced a rise in risky assets on the same day that Korea's financial regulator unveiled guidelines for firms partaking in the government's shareholder value enhancement reform initiative, called the “Corporate Value-up Program”.

It is intended to mitigate the relatively low valuations seen in Korea’s stock market. And the NPS risk profile might influence the program.

“Monitoring NPS's execution plan, including allocation and timing by asset class, is vital to gauge inflow size, especially for ‘Value-up’ beneficiaries,” Park said.

Seo Won-joo

Until now, NPS has allocated assets according to its five-year target ratios set for each asset and reviewed on an annual basis. The new risk profile will be in effect from 2025.

"In order to increase returns, we will flexibly improve the asset allocation system and smoothly promote investment diversification to stably operate the precious retirement funds of the people," NPS's Chief Investment Officer Seo Won-joo said at the announcement.


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