Korea's NPS extends its global reach
Jun has a rather elegant way of explaining his strategy for the NPS: it must move from being a whale in a pond to being a whale in the ocean. To put the size of the NPS fund into perspective, it is reckoned by some estimates to be the fourth-largest pension fund in the world. Its assets are over ten times bigger than the next largest South Korean pension institution - well over 363 trillion won ($321bn). The Seoul stock market’s capitalisation is just US$1.1 trillion, according to the World Federation of Exchanges. Big by the standards of many countries, but too small for Dr Jun: “We impact not only the market, but also the corporations in Korea as we are the largest or second-largest shareholder of many South Korean corporations, he says. “We have more than 5% of shares in 183 South Korean corporations.” The solution to this concentration risk is to move into other less correlated markets and asset classes abroad. But that raises further issues.
South Koreans are very proud of their country and its economic miracle: the Korean War that ended in 1953 made an underdeveloped agricultural country even poorer. In face, South Korea’s economy was smaller at the start of the 1960s than every country in Africa. Now its gross domestic product is about the same as all the countries of Africa put together.
With so many global giants at home, like Samsung Electronics, many nationalists question why the savings of patriotic Koreans should be invested abroad at all. Why not just buy Korean government bonds and keep the money in the country?
“In the past, when the interest rates were high, heavy dependency in the bond market made sense,” says Jun. “But in a low-growth and low-interest rate environment, especially after the 2008 global crisis, investment in the bond market was not enough to meet the target return. We had to make more efforts to achieve proactive diversification.”
NPS hasn’t abandoned bonds. Dr Jun says they remain a vital element in the institution’s portfolio to match future liabilities. But the allocation has dropped from 80% to 60% in the past few years. Dr Jun says he’s a long-term and value-oriented investor. If the NPS is to achieve his growth target of between five and six percent a year, then the fund must look for other opportunities, while keeping public opinion on its side.
“We are a public organization, but all of our investment decisions are market-oriented and made independently and professionally. Nevertheless, we have some 20 million Korean people participating in the system and we need to gain their support and understanding. It is also likewise with the media and politicians.”
He seems to be winning that battle. Voluntary membership - mainly for housewives -skyrocketed from 30,000 to nearly 200,000 in the last three years. “We earned the public confidence with our proven track record,” he says.
Dr Jun’s background certainly may help to calm the fears of nationalists. He’s a Korean through and through. Before he joined the NPS two and a half years ago, he was the founding chairman of the Financial Services Commission - the country’s top financial regulator. Before that he chaired the board of POSCO - the Korean steelmaker that ranks number five in the world in terms of sales, and he spent three years as vice-chairman of Woori, the country’s biggest financial holding company.
But Dr Jun also has a broad and deep understanding of best financial practice elsewhere in the world. He was a professor at Michigan State University and spent fourteen years at the World Bank. He took his MBA and PhD in the United States. “My original background is finance and my doctoral dissertation was on portfolio management. Professionalism is required as the chairman of NPS. I can contribute my expertise and knowledge in international finance and portfolio management, theory and practice.”
Jun has taken NPS into new areas. Now it has offices abroad - in London and New York. It has eight global strategic alliances for training and co-investment. Partners include the Russell, Wellington, CVC, GECRE and AXA. The fund is working with Canadian and Dutch investors and, most recently, China’s Social Security Fund. Jun says,”’Forming and developing long-term relations with China is important because of its growing size, proximity and our interest in the Chinese market as well as Chinese interest in South Korean market. We can be considering investment into the South Korean and international markets under collaboration as a co-investment. We are China’s very first strategic alliance.”
The NPS already has invested in mainland companies via Hong Kong-listed H-shares. But the Chinese government recently granted NPS QFII status and Dr Jun plans stock market investment directly in China very soon.
Currently the majority of the NPS foreign investment is allocated to equities and fixed income. But it has expanded its alternative portfolio too. “That includes real-estate, SOC and some private equity funds,” Dr Jun says. “But, we don’t have hedge funds yet although we might have them in the future.”
Property and direct investment are important. Over the last years or so, NPS have been very active in investing in high quality real-estate properties and SOC projects. They include some high-quality and prestigious buildings, such as HSBC’s headquarters building in London, KDX Toyosu Grand Square in Japan, and Aurora Place, Sydney. NPS also invested more than one billion dollars in the Colonial pipeline project in the US.
Jun seems confident: “We are relatively young pension system and so we expect the fund to continue to grow for over three decades, even with the existing set up. So, we are relatively more comfortable than some of others. But, we are not complacent about the situation.
“Public trust in the national pension management is a must, in order to rally public support for implementing measures to improve our pension system. There is always a cost to it. To make such pension improvements a possibility, this is the time to build public trust for our pension system. Fortunately we are moving towards that trend since I took office and I am very grateful for that.”