South Korean Pension to Raise Allocation to Stocks, Slash Fixed-Income

(June 3, 2011) — South Korea’s roughly $314 billion pension fund is aiming to diversify its investment strategy, flocking toward riskier assets in order to meet its new 6.5% investment return target for the next five years.

The South Korea’s National Pension Service (NPS) — which updates five-year targets annually — has emphasized its goal of increasing its allocation to equities in the next five years, with at least 30% of assets in stocks by the end of 2016, Bloomberg has reported.

While the fund has encountered criticism for its passive investment approached with roughly 70% of its assets in fixed-income, NPS plans to slash its allocation to bonds to below 60% by the end of 2016, compared with 66.9% as of December 31. At the same time, the fund will up its allocation to alternatives to above 10% from its current target of 5.8%.

“We will continue to diversify our investments to boost the fund’s stability and profitability,” the Ministry of Health and Welfare, which controls the NPS, said in a statement.

Furthermore, the South Korean pension fund is expected to increase its betting on overseas properties and energy and infrastructure deals, following its 2009 purchase of HSBC’s headquarters in London for 1.5 trillion won, as well as its purchase of an office building in Sydney for 750 billion won in 2010.

In February, NPS revealed aims to invest $4 billion oversees in alternative assets, including infrastructure investments. Jun Kwang-woo, Chairman and Executive Officer of the NPS, revealed his efforts to spearhead an initiative for the pension to increase its investment in overseas assets to around 20% by 2015 from around 13% at the end of last year. “We are growing faster than capacity in the local market can offer,” Jun told the Wall Street Journal. The pension head said that this year NPS aims to invest a total of $10 billion oversees. Of that amount, $6 billion will be in equities and fixed-income securities and $4 billion in alternatives.

The pension fund’s size is expected to increase to 565 trillion won ($523.1 billion) at end-2016 from 323.6 trillion won at end-2010.

NPS’s aggressive approach toward investing more heavily in alternatives also coincides with the strategy taken by the Korea Investment Corporation (KIC), South Korea’s government-owned investment management company that specializes in overseas investments. KIC’s Chief Investment Officer Scott Kalb told aiCIO in an interview early this year that alternative assets have all been profitable.

In an attempt to diversify away from traditional assets such as bonds and equities, the Seoul-based sovereign wealth fund said it is aiming to make up to four strategic investments next year, increasing its allocation to both public and non-traditional assets such as private equity and real estate in the developing world.