NPS adds real estate managers to boost alternatives allocation

The South Korean pension fund plans to grow overseas and alternatives exposures while also increasing its return target by 2027.

National Pension Service of Korea has added investment bank Goldman Sachs and US real estate firm Bridge Industrial to its roster of overseas real estate investment managers as part of a broader push to increase its exposure to alternatives.

The additions of Goldman Sachs and Bridge Industrial will bring NPS’s total number of  overseas real estate managers to 63, according to a statement. Last year, the investor committed to a number of new real estate funds including Warburg Pincus Asia Real Estate, Apollo Asia Real Estate Fund II and GLP Capital Partners IV, according to PERE data.

As of the end of March, NPS had total real estate AUM of 48.5 trillion won ($37.1 billion; €34.5 billion), representing an increase of 2.1 trillion won since the end of 2022. The asset class represented 31.8 percent of the South Korean pension fund’s alternatives portfolio in Q1 2023.

NPS had not responded to PERE‘s requests for additional information about its commitments to Goldman Sachs and Bridge Industrial at press time. However, the investor typically provides more detailed updates on its new fund commitments in August.

NPS’s expansion of overseas real estate managers list comes at a time when the pension fund is planning to gradually expand its overseas and alternatives portfolios and to also increase its overall investment return target from 5.4 percent to 5.6 percent by the end of 2027, according to its latest five-year asset allocation plan released on Wednesday.

As part of the allocation plan, the investor will aim to invest 15 percent of its portfolio in alternative assets, 30 percent in bonds and 55 percent in equities by 2028. For 2023, NPS is targeting an allocation of 13.8 percent for alternatives, 40 percent for bonds and 46.2 percent for equities by the end of the year. The investor is currently overallocated to alternatives, which accounts for 16 percent of its total portfolio, according to its Q1 update.

It is understood that the overallocation to alternative investments is the result of the denominator effect as the values of NPS’s stock and bond holdings have dropped. Meanwhile, the investor’s portfolio is expected to rebalance later this year with anticipated valuation adjustments in the private markets. Therefore, the investor’s target allocation of 13.8 percent for alternatives by year end is in line with its long-term plan to grow its exposure in the asset class.

The pension fund recorded returns of 6.35 percent for its overall portfolio, 3.49 percent for alternative investments, 12.42 percent for domestic equities, 9.70 percent for foreign equities, 3.25 percent for domestic bonds and 5.38 percent for foreign bonds, according to its Q1 update.

The quarterly performance marks a recovery from last year, when NPS’s portfolio was badly hit by the sharp fall in equities and bonds amid rising interest rates and concerns over a potential recession. The investor posted a return of -8.2 percent for its overall portfolio in 2022. Alternatives was the only asset class that saw a positive return of 8.94 percent last year, according to the update.

“We will strive to improve the rate of return by responding to increased market volatility and continuously promoting investment diversification,” Kim Tae-hyun, chairman of NPS, said in the Q1 update.

-Chin Yuen contributed to this report.