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(News Focus) S. Korea's state pension fund to buy undervalued emerging-market assets

All News 09:01 June 13, 2016

By Choi Kyong-ae

SEOUL, June 13 (Yonhap) -- South Korea's national pension fund, the world's third largest with more than 520 trillion won (US$446 billion) in assets, will initiate a push for investment in undervalued emerging-market assets to broaden its portfolio in pursuit of higher return, its top fund manager said, revealing plans to enter India and Latin America later this year.

Seeking to boost its rate of return to 5 percent this year from last year's 4.6 percent, the National Pension Service of Korea (NPS) is determined to take more risks by seeking investment opportunities in emerging markets, Chief Investment Officer Kang Myoun-wook told Yonhap News Agency.

The NPS' pursuit of riskier assets is inevitable, as it is determined to increase the share of overseas assets in its investment portfolio to 35 percent by 2021 from 24.3 percent at the end of last year, Kang said.

In overseas investments, "We have mainly invested in alternative assets in low-risk advanced countries such as Singapore, Australia, Britain and the United States. While strengthening our presence in developed markets, we will diversify our portfolios by adding more emerging-market assets," said Kang, who took office in mid-February after spending over 30 years in the fund management sector.

"From the second half of this year, we are looking into undervalued bonds in India and alternative assets in Latin America, among other things."

Overseas assets consist of alternative assets as well as equities and bonds. Alternative assets include real estate and infrastructure projects to build roads, bridges and ports, for instance. They do not include traditional assets such as stocks and bonds.

Citing India's big economic growth potential, Kang said the NPS will invest in the Southwest Asian country's treasury bonds and a variety of undervalued bonds. India, the world's second most populous country after China, is considered a young country, with 800 million people under the age of 35.

He mentioned China, Vietnam and Indonesia among the potential markets of the future as well.

"To minimize investment losses in those volatile emerging markets, we will make a thorough market survey over five to six months before executing an investment in local assets," said the asset-management veteran.

Through diversification that includes expanded investments in emerging assets, the NPS can generate a natural hedge. As certain sectors perform well and others poorly, it can lower volatility by combining them.

For this year, the NPS said it will invest a total of 131.1 trillion won (US$113 billion) overseas, up 5.6 percent from 124.2 trillion won a year earlier.

As of March, the NPS' asset base stood at 524.3 trillion won and is expected to reach 1,000 trillion won in about six years. The Korean pension fund is the world's No. 3 state fund following Japan's Government Pension Investment Fund with an asset of 1,300 trillion won and Norway's Government Pension Fund Global with about 1,000 trillion won.

No doubt, the country's investment environments have worsened due to declining exports, restructuring of major shipping and shipbuilding companies and falling interest rates amid a prolonged slump since the 2008 global economic crisis.

Last Thursday, the Bank of Korea cut its key rate to an all-time low of 1.25 percent to support Asia's fourth-biggest economy. Korea's economy is widely expected to grow by around 2.5 percent this year, down from last year's 2.6 percent and the previous year's 3.3 percent.

In aggressive steps not only to bolster returns but also to prevent a future payment crunch, the NPS spent a total of 33.9 trillion won in overseas alternative investments from 2011 to March this year, with properties accounting for 16.4 trillion won, or 48.4 percent, of the total, according to the state fund.

Major investments include a $1 billion deal to buy a 23.44 percent stake from Chevron Corp. in Colonial Pipeline, the largest refined-fuel pipeline system in the U.S., a 1 trillion won ($860 million) purchase of the HSBC headquarters building in London and a 180 billion won purchase of a 12 percent stake in Britain's Gatwick airport.

In stretched efforts for global expansion, the NPS may consider opening more offices overseas under its long-term expansion strategy. It currently runs offices in New York, London and Singapore.

As for the need of reform in Korea's national pension system, Kang stood for the "paying more and receiving less" scheme for the sustainability of the system.

The NPS projected the size of the fund will peak in 2043 and then begin to fall in a country with a rapidly aging population and the lowest birth rate in the developed world. The fund is widely expected to dry up after 2060 if not for raises in insurance premiums. Currently, about 21.77 million people subscribe to the national pension plan in a country with a population of 52 million.

Korea's insurance premium rate is set at 9 percent of income, far lower than an average of about 20 percent for 34 Organization for Economic Cooperation and Development member countries.

"To keep the funds available after 2060, there should be a gradual increase in insurance premiums. Actively diversifying into a wide range of domestic and international asset categories will help contain risks at the portfolio level," said pension expert Jun Kwang-woo, who served as NPS chairman from 2009 to 2013.

If the expected rate of return of the NPS rises by 1 percentage point a year on average, the year of the fund's depletion could be delayed to 2068 (from 2060) and a 2 percentage point rise could delay it by up to 30 years, he said.

Meanwhile, Kang said he is now struggling with another daunting issue, as his NPS Investment Management (NPSIM) division, now located in southern Seoul, is to move to the NPS' new headquarters in Jeonju, North Jeolla Province, by February next year.

The relocation of some government organizations from the capital city to regional cities has taken place in past years under the government's broader plan to seek balanced growth across the country.

Last year, more than 10 out of 200 NPS asset managers reportedly left the company as they didn't want to move to Jeonju, 243 kilometers south of Seoul, due to difficulties in their children's education, lack of infrastructure and other reasons. More reportedly look set to quit this year.

"Managing funds requires close monitoring and interacting on a daily basis. For employees who will be forced to commute from Seoul to Jeonju daily or weekly, the long distance may keep them from focusing on their asset-managing duties," an official at the NPS said, fearing the relocation would weaken the competitiveness of the NPSIM.


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