Korean National Pension Fund Loses More Than 8% in 2022

Despite downturn, the $684.5 billion fund’s losses were offset by an increased allocation to alts.



The Republic of Korea’s National Pension Fund reported an 8.22% investment loss for the fiscal year that ended on December 31, which it attributed to combination of monetary tightening by central banks and Russia’s invasion of Ukraine.

However, some of the South Korean fund’s losses were offset by an increased allocation to alternative assets, as well as by foreign exchange gains from a strengthening dollar, as the fund ended year with an asset value of 890.5 trillion won ($684.5 billion).

Domestic equities weighed down the portfolio the most, losing 22.76%, while foreign equities was the second-worst performing asset class with a 12.34% loss for the year. The fund attributed the losses in equities to “ongoing market volatility at home and abroad triggered by the prolonged war in Ukraine and the U.S. Federal Reserve’s aggressive tightening stance to tame surging inflation.”

Due to sharply rising interest rates, the portfolio’s domestic and foreign fixed-income investments fell 5.56% and 4.91%, respectively, while short-term assets were down 0.86% for the year. The fund noted that it was “highly unusual” that equity and fixed-income markets fell in tandem during the year.

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“Historically, equity has been considered risky and fixed income has acted as a safe haven, moving in opposite directions and thereby offsetting each other,” the pension fund’s report stated. “That was not the case in 2022 as both plunged simultaneously for the first time since the stagflation in the 1970s in the overseas markets and for the first time since 2001 in the domestic market.”

Alternative investments, which benefited from capital appreciation and realized gains from real estate and infrastructure assets, were the top-performing assets, returning 8.94% during the year. The fund said its alts assets were also aided by the strengthening of the U.S. dollar.

Despite the down year, the pension fund said its traditional asset classes outperformed their respective benchmarks on a time-weighted return basis. Foreign fixed income outperformed its benchmark by 88 basis points; domestic equity by 47 bps; foreign equity by 15 bps; and domestic fixed income by four bps.

The pension fund said that after the challenging year in 2022, global financial markets started 2023 on a stronger footing and the National Pension Service’s investment portfolio, including equity and fixed income, has recovered from the losses that occurred last year.

“Heightened external uncertainty made 2022 an extremely rare year where both equity and fixed income tumbled together,” Kim Tae-hyun, the chairman and CEO of the NPS, which manages the fund, said in a release. “Looking ahead, I expect that financial markets will maintain recovery pace and the fund will generate better returns in 2023.”


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SEC Proposes Updates to Cyber and Data Security Rules

One new rule from the SEC would update Reg SCI; the other would update Reg S-P, both to require more timely reporting of data breaches.


The SEC last week proposed changes to Regulation Systems Compliance and Integrity (Reg SCI) and Regulation S-P, also called the Safeguarding Rule, at an open hearing.

Reg SCI

The current Reg SCI, adopted in 2014, requires SCI entities to have security policies, take corrective action in response to system issues and undergo business continuity and disaster recovery testing. Under the proposal, BC/DR tests must also address the unavailability of a third party to which the SCI entity outsources. They also must immediately notify the SEC of a wider range of cyber events, such as those that deny access to systems and processes of the SCI entity.

SCI entities include self-regulatory organizations like FINRA, stock and options exchanges, registered clearing agencies and alternative trading systems.

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If the new rule is adopted, SCI entities would have to make significant changes to some of their policies. They would need to update their procedures to include “the maintenance of a written inventory and classification of all SCI systems and a program for life cycle management; a program to prevent the unauthorized access to such systems and information therein; and a program to manage and oversee certain third-party providers, including cloud service providers, of covered systems.”

The proposed update to Reg SCI would also expand the entities that are subject to the rule. Currently, SCI entities are those involved in trading, clearance and settlement, and market regulation. Under the proposal, registered security-based swap data repositories, clearing agencies that are exempt from registration and large broker/dealers would also be subject to the rule.

The proposal was approved by a 3-2 vote, with SEC Commissioners Mark Uyeda and Hester Peirce dissenting. Uyeda expressed specific concern about the reporting requirements of the proposed Reg SCI and how it would interact with reporting requirements from other rules. Reg SCI requires immediate notification to the SEC of “significant cybersecurity incidents.” Uyeda wrote that overlapping reporting requirements can be confusing and might undermine cybersecurity if registrants are more concerned about reporting in a timely manner than addressing the breach.

Reg S-P

An update to Reg S-P, which was also proposed by the SEC on Wednesday, would require broker/dealers, registered investment advisers and transfer agents to adopt policies for the protection of customer records and notify clients affected by data breaches that put them at risk. Covered institutions must have written policies that outline an incident response program to address unauthorized access to customer information and to provide timely notification to affected individuals.

The covered institutions must inform customers of a data breach “as soon as practicable,” but cannot wait longer than 30 days from the date they became aware of the breach.

SEC Commissioner Caroline Crenshaw, who voted for both proposals, said the update to Reg S-P is important because it would expand safeguarding requirements to transfer agents, who are uncovered under the existing Reg S-P, which was finalized in 2000.

SEC Chairman Gary Gensler, who also voted for both proposals, said in a statement that covered institutions currently have no obligation to inform their customers of data breaches, even though awareness would allow those customers to take steps to mitigate the damage done to them by the breach.

 

 

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