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NPS alternatives allocation rises to 9.9% in 2014

Real estate comprised the highest share of the Korean state investor’s alternatives portfolio, according to its 2014 annual report.  

Korean state pension fund, the National Pension Service (NPS), saw its alternative investments rise to 9.9 percent last year, up from the 9.4 percent in 2013, according to its latest annual review.

The valuation of its alternative assets remains below NPS’ 11.3 percent target stated in the fund’s targeted portfolio plan.

According to the report published earlier this week, NPS’s alternative assets under management amounted to KRW46.7 trillion (€40.31 billion; $43.10 billion), a 15.7 percent increase from the previous year. The overall assets under management increased from KRW 427 trillion in 2013 to KRW 469.8 trillion in 2014.

The total return from alternative investments was recorded at 12.27 percent, outperforming the 6.42 percent return recorded in 2013.

The report attributed the positive returns to the increase in asset values due to the economic recovery in the US, improvement in corporate performance, recovery in the property markets in the leading industrialized nations and decreased discount rate due to fall in interest rate.

Choi Kwang, chairman and chief executive officer of NPS, said in the report that NPS had increased its share of overall global investments to 21.8 percent and alternative investments to 9.9 percent with a view to diversifying its portfolio and subsequently reducing its dependency on the domestic market for stable returns.

Of the total alternatives allocation, the highest allocation was global real estate investments at 26.1 percent, while 13.1 percent was allocated to domestic real estate investments. However in a relative comparison with the previous year, the share of real estate has dropped slightly while the allocation to global infrastructure investments has increased. In 2013, 28.1 percent was allocated to global real estate and 14 percent for domestic real estate. The allocation to global infrastructure, on the other hand, increased from 8.4 percent in 2013 to 10.6 percent last year.

Returns from the fund’s real estate investments were recorded at 13.58 percent for its global holdings and 10.27 percent for its domestic holdings. The only negative returns were recorded from domestic equities, which clocked -5.5 percent in 2014, attributed to the slump in the Korean stock market.

NPS has been steadily increasing its exposure to alternatives as it attempts to reduce fixed-income holdings in the portfolio. As per the five-year medium term asset allocation plan, the state fund intends to increase its allocation to alternatives to more than 10 percent, and reduce fixed-income holdings to less than 60 percent of the total portfolio.

“Although we expect another challenging year for investments in 2015, we will prepare for the era of KRW 1,000 trillion AUM through diversification of investment portfolio and strengthening our fund management capabilities,” said Kwang.

NPS’ global real estate investment expansion was led by Andie Kang, who, in March, stepped down from his role as the global head of real estate after a decade of service. He has become co-chief executive officer at IGIS Asset Management, the biggest real estate investment manager in Korea.

In line with its diversification strategy, NPS also revealed in February this year that it is in the process of hiring foreign nationals for its global investment teams in New York and London. In addition, it is also set to open NPS’s first branch office in Asia in Singapore by July.