UPDATED: Korea’s NPS lags on returns, replaces equity head

Korea’s National Pension Service (NPS) has posted significantly lower returns than many other large public pension funds, with local media reports suggesting the state retirement fund needs to improve the efficiency of its fund management. 

One reason for NPS’s lacklustre performance last year was the underperformance by its domestic equity portfolio. The fund has subsequently appointed former head of risk management Cho In-Sik to replace head of domestic equity investment Han Jung-Su, who becomes team head of risk management. This was part of a move on Friday (March 4) to put in place eight new divisional heads. 

Industry observers are hopeful that new NPS leadership – chief executive Moon Hyung-Pyo and chief investment officer Kang Myoun-Wook – will provide the impetus to make further necessary changes.

NPS’s assets under management rose 9% to W512 trillion ($427 billion) in 2015, but investment return only contributed 4.57% of that. The fund has posted a five-year annualised return of 4.7%. 

Meanwhile, major pension funds elsewhere have yielded double-digit returns over the same period. The $279 billion California Public Employees’ Retirement System returned an annualised 10.7% over the five years to June 30, 2015 (though it yielded only 2.4% in the last year of that period).  

Toronto-based Canada Pension Plan Investment Board, with C$282.6 billion ($211.7 billion) in AUM, posted a net nominal rate of return of 18.7% in the 12 months to March 31, 2015 and 12.3% over the five years to that date.

Japan’s $1.2 trillion Government Pension Investment Fund returned 6.64% annualised in the five years to March 31, 2015, though in the nine months to end-2015 its investment return was -0.37%.

NPS’s lacklustre performance last year was largely down to unproductive local equity investments. It had an 18.5% allocation to domestic stocks last year, which yielded 1.7%, compared to 3.9% for the Kospi benchmark index. 

However, the fund's foreign equity portfolio (13.7% of the fund) returned 5.73% in 2015, outperforming its benchmark (the MSCI All Country World Index (ex-Korea)) by 1.5%. 

NPS’s alternative assets also performed relatively well last year, with the domestic portfolio returning 8.98% in 2015 and the global allocation 14.9%.  

The fund is reportedly considering merging the local and global alternatives divisions and making sub-divisions by asset types such as real estate, infrastructure, hedge funds and private equity, with a view to achieving more efficiency and better returns.

NPS’s asset class allocation last year was 52.4% in local fixed income, 18.5% local stocks, 13.7% overseas stocks, 4.2% overseas fixed income, 4.4% local alternative investments and 6.3% global alternatives.

Kang, former CEO of Meritz Asset Management, was appointed as NPS CIO last month after a new CEO came in on December 31, with a view to drawing a line under a spat between previous the CEO and CIO. 

In support of Kang’s appointment, one asset management industry executive praised his communications skills with investors, the government, the public and the media. He executive added that Kang was regarded as an expert in both local and global investments and an the kind of individual who would work well internally at the NPS. 

Meanwhile, AsianInvestor has argued that the fund should attribute more importance to performance of management executives rather than strictly adhering to term limits.