It is not easy overseeing investment decisions - you are tasked with creating a return, but must do so without taking too much risk.
All investment professionals have their own stakeholders to cater to, and the same goes for public pension funds and sovereign wealth funds. While some government structures make it less of a political discussion, democratic parliaments see elected officials fishing for populist support by bashing the performance of public pension funds and sovereign wealth funds.
A recent example occurred in Korea recently where the National Pension Service (NPS) - the Korean state pension fund which is projected to run out of funds as early as 2057- has been under scrutiny.
“Today, six of the 20 members of the NPS’ Fund Management Committee - the fund’s top decision-makers in terms of actually handling the money - are government officials,” Jeong Woo-yong, a member of the NPS’ Fiduciary Liability Committee, said at a press conference held on November 7 at the National Assembly to improve the NPS’ governance structure.
He pointed out that the fund’s key decision-making bodies consisted of “too many” government officials and lacked economic experts. This, he said, was hindering the fund’s growth, increasing the fund’s vulnerability to being abused by different government projects and leading to lacklustre profitability.
“This makes it difficult for the NPS to be free from government intervention. The previous two administrations made attempts to use the state fund for its own projects, but they should not even think of touching the state retirement plan because it’s not their money,” Jeong added.
Politicians and shifting governments have seen NPS as a political tool with sometimes damaging consequences. An example was the decision to move the NPS headquarter away from Seoul, the capital and financial hub, to Jeonju, a minor city 200 kilometers and a three-hour drive south.
Unsurprisingly, the relocation led to an exodus of staff that didn’t want to move or commute to Jeonju. Now, Korea Investment Corporation, the country's sovereign wealth fund, are rumoured to potentially face a similar move out of Seoul, AsianInvestor learned from Korean investment industry sources.
A DAMNED DILEMMA
Anyone with even a passing knowledge of investment and the role of these asset owners knows that no investment can be made without risk: that long-term investment strategies will sometimes see performance dry spells and negative returns.
When markets are going up, the risk profile of public asset owners will have a relatively tempered performance. “Damned if you do, damned if you don’t,” as the saying goes. A negative, short-sighted approach to performance always has the capacity to raise some public outrage.
All asset owners need regulation, proper governance and rigid scrutiny, and even more so when it is a public entity. However, such scrutiny can also lead to a general fear of backlash and therefore also less desire to be publicly outspoken about investment strategies.
This can make it harder for peers, and the investment industry, to know about asset preferences.
Other than fiduciary obligations, it is understood that these investors are so big that they need to consider that they can move the needle and influence market sentiments. None more so that than the world’s largest pension fund, Japan’s Government Pension Investment Fund (GPIF).
While the state pension fund is cautious about its public appearance, it is also subject to the vagaries of polltics. In June, Japan’s prime minister Fumio Kishida and his cabinet announced a push for GPIF to allocate funds to domestic venture capital and start-ups, a move that brings asset-type diversification, but in no way align with the general low-risk investment strategy of GPIF.
The phenomenon is not isolated to Asia.
In the US, public pension funds and asset managers are seeing a political backlash on what is regarded as “woke” investment agenda that align with environmental, social and governance (ESG) criteria.
A spokesperson from a European public pension fund told AsianInvestor how the pension fund is now treading more cautiously as the quarterly investment results are showing negative performance. In such a situation, it is not timely to publicly boast about future investment plans, the rationale follows.
For the sake of investment performance as well as recruitment and retention of talent, it would be wise to let investment professionals do their job and implement the right long-term strategy to succeed, creating the correct risk-adjusted returns.
As Jeong Woo-yong, a member of the NPS’ Fiduciary Liability Committee, said at a recent press conference: “The NPS’ main goal of reform should be achieving a solid return on investment to ensure the retired life of Korean citizens’ in an ageing society.”