South Korea's Pensions to Boost Equity Stake

Jung Jae-yoon reports in the JoongAng Daily, Pension funds seen increasing equity stake:

Analysts say they expect the nation’s public pension funds, which now hold more than 300 trillion won ($252.73 billion) in assets, to be increasing their equity holdings soon.

A new survey showed that 330 trillion won in total is held by the nation’s main pension funds, including the National Pension Fund, the Retirement Pension Fund, the Korea Teachers Pension Fund, the Government Employees Pension Fund and the Military Pension Fund, the Financial Supervisory Service said yesterday.

The data is based on the amount held at the end of June, except for the Military Pension Fund, the latest figures for which were at the end of 2009.

Nearly 98 percent of the pension funds, or 326 trillion won, is invested in various financial instruments, with bonds taking the biggest portion, followed by equities and alternative investments such as real estate.

In the case of the National Pension Fund, which is the biggest by far with 294.95 trillion won in assets, 75.7 percent of its financial investments are in bonds, with 19.1 percent in various forms of equities and 5 percent in alternative investments.

Analysts say that the public pension funds are likely to increase their exposure to equities in an effort to get bigger returns on their investments than that offered by bonds.

Pension funds still lack the clout in influencing the stock market in the same way as foreign investors. At the end of June, foreigners held 301.07 trillion won worth in equities and 67.82 trillion won in bonds.

But market analysts believe there is a possibility that pension funds could become a key power in the local stock market to challenge that of foreigners.

“Domestic national pension funds will have little choice but to expand their portion of equity investments in the future since they can’t generate high returns through bonds when interest are so low. The pension funds hold a smaller portion of equity investments compared to those in advanced countries,” said Oh Sung-jin, research head at Hyundai Securities.

The National Pension Fund is the fourth largest in the world.

You'll recall South Korea's National Pension Service recorded an overall return of minus 0.75% in 2008, its first loss ever, with its investment in stocks yielding minus 41.20% that year. Even though it was the worst return in the Korean fund’s two-decade history, it still beat other large pension funds which experienced devastating losses of 25%, 30% or more that year.

Last March, South Korea’s fund got more flexibility to mix investments between stocks and bonds:

The pension fund will be given a range of as much as 7 percentage points either side of the target weighting for local stocks of 17 percent, the ministry said. Previously, the range was as much as 5 percentage points.

The range for local bond investments will be widened to between 56.3 percent and 82.3 percent of total assets in 2009, or a difference of as much as 13 percentage points either side of the target weighting of 69.3 percent. Previously, the range was as much as 10 percentage points.

What remains to be seen is whether South Korea's pensions will also boost their stake in foreign stocks and bonds. As I stated in my previous post, shifts in asset allocation from these sovereign funds are important and need to be carefully monitored.