Thursday, January 12, 2017

Scandal at Korea’s Retirement Giant?

Bruce Einhorn and Heejin Kim of Bloomberg report, A Scandal at Korea’s Retirement Giant:
With 546 trillion won ($456.5 billion) in assets, South Korea’s public National Pension Service is the world’s third-largest pension fund, behind Japan’s and Norway’s. It’s also become a part of the widening scandal surrounding impeached President Park Geun-hye.

On Dec. 31, a Seoul court issued a warrant for the arrest of Moon Hyung-pyo, chairman of the NPS. He was suspected of having pressured the fund, when he was a government minister, to support the controversial merger of two Samsung Group-affiliated companies. Moon’s lawyer said the chairman denied the allegations, according to reports in Korean media. Authorities also want to know whether Samsung made donations to benefit a confidante of the president in exchange for help getting NPS support. Jay Y. Lee, Samsung’s heir apparent and de facto leader, was summoned to be questioned as a suspect on Jan. 12. Both Samsung and Lee have denied wrongdoing. The NPS has said it supported the deal based on investment considerations.

Established in 1988, the NPS is Korea’s main public retirement plan and a major investor in the country’s blue-chip companies, owning 9 percent of Samsung Electronics, 8 percent of Hyundai Motor, 10.3 percent of LG Display, and large stakes in other prominent companies. Its potential influence as a shareholder makes it a natural target for pressure from politicians seeking favors from the corporations in its portfolio. The scandal has “created huge risks to the integrity and legitimacy of the NPS,” says Katharine Moon, a political science professor at Wellesley College.

As the fallout from Park’s impeachment spreads, some lawmakers are looking into reforming the pension service. The alleged use of the fund’s investment clout to advance politicians’ agendas “can bring doubts on Korea’s capital markets overall,” says Chae Yibai, a National Assembly member from the opposition People’s Party. “We need to discuss the matter of the independence of the investment management unit from the control of the government, like overseas pension funds,” he says.

Despite its size, the NPS often takes a passive approach in its relations with the chaebol, the family-run conglomerates that dominate Korea’s economy and have close ties with local politicians, says Woojin Kim, an associate professor of finance at Seoul National University. The fund’s management structure contributes to its low-key approach. The NPS has three decision-making bodies to provide public input into investment decisions, but “none of them is formed of members with knowledge of asset management or pension funds,” says Kim Sang-Jo, a professor of international trade at Hansung University in Seoul. Instead, officials from business lobbies, labor unions, and civic groups dominate the committees, and “they have little power or interest in decision-making on important issues at NPS,” says Kim.

The NPS has occasionally taken a more active role, particularly when the government has the lead on an issue. In early 2016 the fund announced plans to blacklist companies that didn’t follow Park’s directive to raise their dividend payouts, part of her effort to get chaebol to reduce their cash hoards and return money to shareholders through dividends or to workers via wage increases.

The NPS has recently felt some pain from a government-dictated relocation of its headquarters to Jeonju, a sleepy provincial capital about 125 miles south of Seoul. During her campaign for president in 2012, Park pledged to help redevelop the southwestern city. More than 30 fund managers, including about 20 in charge of overseas investment, have left the fund rather than relocate, according to the NPS.

By focusing public attention on the tangled relationships among the government, the fund, and business, the turmoil may ultimately help the NPS achieve one stated goal: to invest more outside Korea. “The Korean stock market is going to be too small for them,” says Michael Na, a Korea strategist with Nomura. “More and more of the money will go overseas.” Foreign investments account for less than 150 trillion won, about 27 percent of its total assets, but the NPS wants to expand its foreign portfolio to more than 300 trillion won by 2021. This year it plans to increase international holdings by about 25 trillion won, of which 10 trillion will go to alternative investments such as private equity or bank loans. The NPS in July picked BlackRock and Grosvenor Capital Management to manage as much as $1 billion in hedge fund investments. As for local stocks, the fund “will cautiously approach investing in domestic markets for this year,” spokeswoman Chi Young Hye says.

Moving beyond Korean equities wouldn’t only reduce the risk of political meddling but would also potentially improve investment performance, says Moon of Wellesley. That will be essential as NPS fund managers face the task of supporting Korea’s aging population. “They know the math,” she says. “There will have to be a push to diversify and decrease the overinvesting in a small number of companies.”

The bottom line: Korea’s public retirement plan is a major shareholder in the country’s most important companies, and its chairman has been arrested.
So, what else is new, a scandal at a large national pension fund with paltry governance? How shocking!

Sorry, I'm still in a crabby mood and recovering from the flu with off and on low grade fever but I decided to write on this because it's just another example of a large pension fund -- in this case, the third largest in the world -- where lack of proper governance leads to political interference and corruption.

South Korea’s National Pension Service should first and foremost get its governance right. It should relocate its headquarters back to Seoul (nobody worth anything will want to live in Jeonju) and hire a top-notch consulting firm like McKinsey or Boston Consulting Group to make a series of recommendations on how it can bolster its governance, adopting Canadian pension governance standards.

In Canada, there is is a clear separation of pension investments and governments. Instead, most have an independent qualified board overseeing the operations at these pensions where decisions of where and how to invest are made solely by senior pension fund managers that are paid extremely well to run these organizations.

Is it perfect? No, it isn't and there is always room to improve on governance, but it's a lot better than having your national pension fund run by a bunch of corrupt cronies who are looking to line their pockets.

The thing that gets me is the part of Korea's NPS allocating a billion dollars to hedge funds and picking BlackRock and Grosvenor Capital Management.

On Wednesday, Bloomberg reported that BlackRock’s main quantitative hedge-fund strategies were on track to post big losses:
At least three of the quant strategies used by BlackRock’s global hedge fund platform have suffered losses greater than 10 percent in the year through November, according to the client update, a copy of which was seen by Bloomberg. That compares with an average return of 3.6 percent for quant funds, Hedge Fund Research Inc.’s directional quant index shows.
In September, Mark Wiseman, the former head of the Canada Pension Plan Investment Board, was brought in to run the group and no doubt use his huge Rolodex to garner new assets.

But things aren't going well for this group. I don't know what exactly is going on at Blackrock's SAE team but it's losing top talent and investors. Larry Fink, BlackRock’s CEO, is right to feel frustrated with the group's poor showing (not the end of the world as BlackRock is cleaning up house in its low-cost funds business).

[Note: Too many quants with PhDs all doing factor-based models are getting killed. BlackRock needs to really understand why these strategies are unable to perform and if it can't get to the bottom of it, shut these operations down until it has clear answers to explain their poor performance to investors.]

As far as Grosvenor Capital, it's a well known fund of funds which invests across hedge funds and other alternative funds. It has a solid reputation but again, why is NPS investing in any hedge fund before it gets its governance right? That just doesn't make sense to me.

I think Korea's NPS should be revamped and the first order of business is to drastically improve its governance. Forget hedge funds, private equity funds, infrastructure, real estate or foreign investments. Get the governance right first, implement fraud detection and whistleblower policies, use top-notch consultants and forensic accounting firms to beef up internal compliance and then worry about investing in hedge funds!

By the way, those of you looking to invest in a great macro hedge fund, Bloomberg reports Chris Rokos’s hedge fund rose about 20 percent in 2016, its first full year of trading, to become one of the world’s best-performing money pools betting on economic trends, according to people with knowledge of the matter.

In my opinion, Rokos is a superstar macro manager, one of the very best in the world. Brevan Howard has never been the same without him and he really performed exceptionally well last year which wasn't an easy year for most hedge funds in general and macro funds in particular (just ask Mr. Soros who lost a cool billion after Trump was elected; Rokos one-upped him last year).

Below, Bloomberg reports on the scandal engulfing Korea's national pension fund. I hope this is the wake-up call that prompts officals overseeing the NPS to revamp its governance once and for all.

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