With combined assets under management of US$1.45 trillion, South Korea’s state-owned investors – comprised of one sovereign wealth fund and six public pension funds – are major players in global markets, and their evolving strategies are set to have a significant impact on investment flows, with alternative asset classes set to be the main winners.

The Korea Investment Corporation’s (KIC) portfolio grew 6.9% to US$181 billion in the first half of the year, which partly reversed the 14.4% loss (US$30 billion) last year amid a rout in public equity and fixed income asset classes – the first half of this year those same assets grew 8.3%.

KIC’s public equity holdings rose 14.4% while fixed income increased 1.9% in the January-June period, reflecting the bounce-back on the US market. The fund did not disclose half-year returns on alternative investments, which grew by an average of 9.7% in 2018-2022 and are subject to valuation at the year-end.

This year, the sovereign wealth fund is aiming to expand alternatives to 25% of AUM from 23% in 2022 to diversify away from traditional asset classes, with private debt and infrastructure its main targets. It is also looking for geographical diversification with the opening of a new office in Mumbai by the year-end, in addition to its offices in New York, London, Singapore and San Francisco.

The sovereign fund’s outlook is sanguine. KIC CEO Jin Seoung-ho told a press conference, "The prevalent market perception is that the peak of inflation has passed, mitigating concerns over further recession. The maintenance of solid fundamentals in real economies, including the US, has also contributed to the revival of psychological preference for risky assets among investors, which resulted in the rise of stock prices.”

Meanwhile, another Korean state-owned investor – the massive US$741 billion National Pension Service (NPS) – reported an 8.6% profit (US$62 billion) in fund management in the first four months of the year due to the strong performance in traditional assets, almost recovering from the 8.2% loss in 2022. While KIC exclusively invests abroad, NPS has a mix of domestic and foreign holdings. NPS’ fund management allocated 43.3% of assets to equity, 40.6% to fixed-income and 16.1% to alternative assets as of end-April. Its overseas and domestic equity investments achieved 14.7% and 13.9% profits in the first half, respectively. Global and domestic bonds posted 8.5% and 3.6% profits, respectively. Its alternatives portfolio returned 6.2%.

NPS is also looking to diversify its portfolio under a five-year plan announced in May, which will see it invest 55% of its total assets in stocks (up from a 46.2% target this year), 30% in bonds (down from 40%) and 15% in alternative assets (up from 13.8%) during the 2024-2028 period. It also raised its target investment return for the next five years from 5.4% to 5.6%.

NPS is under pressure to improve performance. Its assets are forecast to decline from 2039 and be totally depleted by 2055, according to South Korea’s National Assembly Budget Office’s estimates. Facing the prospect of receiving lower retirement benefits than their parents, younger people are pressing for the option to leave the pension programme altogether. The government is seeking to extend the fund’s life, requiring improved yields.

In the bid to improve profitability, NPS hired three new global asset managers: Goldman Sachs and Chicago-based Bridge Industrial join its overseas real estate managers, while Coatue Management LLC, a US tech-focused investment firm, became a new GP for global hedge funds.  Tech is also a theme in its domestic public equity strategy. The pension giant expanded its holdings in local semiconductor and chip equipment firms in Q2 to take advantage of tight global markets caused by supply disruption. Its market disclosure on the Korea Exchange this week showed it had stakes or 5% or more in 306 listed companies, with a total value of KRW132 trillion (US$104 billion). Most of its increased positions were in the semiconductor sector.

Meanwhile, NPS is pushing for higher yield in private equity and has committed KRW210 billion to the Macquarie Korea Opportunities Fund (MKOF) VI and KRW295 billion each to IMM Private Equity and Hahn & Co, according to Korean media. The pension giant said last month that it had tapped the three investment firms to manage Korean private equities.

The fund’s ability to deploy such large sums is constrained by its own workforce limitations. NPS has been struggling with talent attraction and retention since it moved its headquarters 200km south of Seoul, frustrating its target of doubling its staffing size to 500. While in-house capabilities are being developed, NPS’s planned growth will remain heavily reliant on external managers, particularly in foreign markets.

The NPS’s diversification strategy is also not without its critics, principally domestic retail investors who are dismayed at its decision to dump stocks. Overseas markets represent over two-thirds of investments in alternatives, suggesting that domestic public equity is being liquidated in favour of foreign investments. The Korean fund aims to raise foreign holdings to 55% of its portfolio by 2025, up from 35% in 2019. Given the fund’s size, small adjustments in domestic stocks would mean billions flowing out of Korea into foreign assets.

Related funds KIC NPS
Related tags AuM Strategy Returns