South Korea's public pension fund National Pension Service (NPS) plans to expand its overseas stock investment rates from 20 percent to 24.5 percent by 2021. On the contrary, it will reduce the domestic stock investment rates from 20 percent to 17.5 percent and the domestic bond investment rates from 45 percent to 40 percent.
The Working and Evaluation Committee for National Pension Fund Operation held a meeting at the Plaza Hotel in Seoul on May 9, and came up with “National Pension Asset Allocation Plan for Intermediate-term of 2017-2021.”
The catch here is that the NPS will decrease domestic assets, including stocks and bonds, while increasing overseas assets, including stocks and alternatives. First of all, the NPS has decided to expand its foreign stock investment rates from 20 percent in 2020 to 24.5 percent in 2021. When the company makes investment in foreign stocks according to the new plan, the gross investments will grow by 170.7 trillion won (US$146.02 billion) from 74.3 trillion won (US$63.56 billion) at the end of 2016 to 245 trillion won (US$209.58 billion) in 2021. It will also increase by 75.6 trillion won (US$64.67 billion) from 169.4 trillion won (US$144.91 billion) of the target figure at the end of 2020.
The overseas alternative investment rate will rise as well. The NPS plans to raise its alternative investment rates by 2.5 percent points from 11.5 percent at the end of this year to 14 percent by 2021. Then, the total amount of alternative investments will be increased by 114.4 percent from 65.3 trillion won (US$55.86 billion) to 140 trillion won (US$119.76 billion). Considering the fact that the National Pension Fund Operation Committee changed its ratio of overseas alternative investment to domestic alternative investment from 6 to 4 to 7 to 3 last year, the overseas alternative investments will grow further.
On the other hand, the rates for domestic stocks and bonds will be lowered. The NPS is planning to decrease its target rates for domestic stock investment by 2.5 percent points from 20 percent in 2020 to 17.5 percent at the end of 2021. The figure is down 0.5 percent point from 18 percent of the domestic stock rates which was announced by the intermediate-term asset allocation task force team earlier. It also discussed ways to decrease its domestic stock investment rates to 16.5 percent, but it is unlikely to adopt them. Since the government-led intermediate-term asset allocation plan has been introduced in 2006, it is the first time for the targeted domestic stock investment rate to be lowered than 20 percent. The NPS will also plan to reduce its domestic bond investment rates from the current 51.4 percent to 40 percent by 2021.
The reason why the NPS increases the foreign asset rates and decrease domestic assets is closely related to the protection of the investment earnings rates. As the returns on domestic bonds are falling due to the low growth and low interest rates and the domestic stock market stayed at the box pattern for a long time, the NPS’ earnings rats for domestic investment assets have shown poor performance. The figure stood at 1.67 percent at the end of last year, lower than 3.88 percent of market profit rates. Moreover, its return on domestic bonds was 4.29 percent, up just 0.02 percent compared to the market. However, its returns on foreign stocks and alternative investments reached 5.73 percent and 14.9 percent, respectively. Another factor for the NPS to be forced to turn its eyes to overseas markets is that its dominance in the stock market is strengthening as its size of funds is snowballing and the domestic stock market is slow.