NPS shines for investing prowess amid restructuring

National Pension Service of Korea was one of the most successful asset owners in this year's AsianInvestor's Institutional Excellence Awards this year, taking the top country award for Korea and receiving the institutional capability award for investment capabilities. Here we outline why we felt the $36.4 billion institution was worthy of these two awards.

AsianInvestor has already announced the full list of winners by country, category and proficiency, and published details last week of how we came to our final decisions. Scroll to the end of this article for links to the award write-ups we have already published.

The full list of write-ups, along with photos of the winners, will appear in the December issue of AsianInvestor magazine.

The National Pension Service (NPS) is growing fast. Its assets expanded W42.5 trillion ($36.4 billion) last year to reach W533 trillion. This is set to reach W2.56 quadrillion by 2043.

The fund is adding resources to keep up. It hired 76 investment professionals in 2015, taking its total to 287, and added 20 more in an initial recruitment phase this year too.

NPS suffered a public spat between its previous chairman and chief investment officer in 2015, which led the government to replace both. Moon Hyung-Pyo was appointed chief executive in December 2015, and Kang Myoun-Wook joined as chief investment officer in February. He was viewed as a good hire, given his investing rather than political background. Nevertheless, the unseemly personnel shifts underline NPS’s vulnerability to political tinkering. 

More positively, experts say the new leaders are interested in new ideas and well understand the need for a broader investment approach. Additionally, NPS’s senior managers have worked at the fund for over 10 years on average, and the fund is reorganising itself to address its needs. 

In 2015 it created new FX management and global infrastructure teams. Under Moon and Kang, the organisation has split its equities coverage into local and globally focused teams, and separated risk management into public market and private market risk management teams. The latter manages the risks of its alternative investments. 

NPS is also transparent. Several members of its oversight committee are members of the investing public, and it publishes information on its fund management plans, operation guidelines and even monthly rate of returns via its website and that of the Ministry of Health and Welfare. As part of these efforts, it introduced details on its ‘responsible investment’ approach last year.

Investment capabilities 

Korea’s largest retirement fund has been on a charge to build its international investment capabilities to accommodate an onrush of capital. 

In 2015 the W533 trillion NPS hired 80 new investment professionals in 2015 and another 20 in the first half of 2016, and it is still seeking more hires. Several dozen of the new appointees focus on global investments, with the fund aiming to expand its overseas asset allocation from 22% to over 30% by 2020. 

The fund has also expanded its New York and London offices to help identify alternative investments, while it opened a Singapore office in September last year to cover the southern half of Asia. 

NPS has planned to raise its alternatives allocation from 9.9% of total funds in 2015 to 11.5% by the end of this year. NPS has expanded its geographies of interest too, buying into real estate projects in China and Malaysia, and signing a memorandum of understanding in infrastructure investment with Saudi Arabia’s sovereign wealth fund. 

It has also sold chunky property assets in a timely fashion. In December 2014 the fund sold the HSBC Building in Seoul for an overall return of W900 billion, and in May 2015 it offloaded the Helmsley Building in New York, in which it has a 49% stake, for $1.2 billion. 

Meanwhile NPS has looked to new investments such as aircraft leasing, while in July it picked BlackRock Alternative Advisers and Grosvenor Capital Management to operate a debut 0.5% allocation into funds of hedge funds.

Its asset shift led fixed income assets to drop from 60% in 2014 to 57% of AUM last year, while equities and alternatives constituted 43% of the portfolio. The fund’s strategy paid off last year. It reported W21.7 trillion in investment returns during 2015, equivalent to 4.6% of AUM — one of the highest return rates among global pension funds. Its non-domestic assets returned 7% — impressive given the volatility exhibited during the year. Alternatives demonstrated why they appeal so much, offering a 12.3% return.

NPS next intends to improve its tactical asset allocation methods and strengthen global research as it seeks to increase global equities to 25%, of AUM and raise its total international allocation of 35% by 2021. The fund isn’t done refining its investing processes just yet. 

Add into this its robust investment return – it generated a 4.6% return rate in 2015 – and NPS is a worthy winner.

Write-ups already published (and what they were awarded for):