Giant South Korean pension fund advances global plans

South Korea's National Pension Service is moving to build a globe-spanning organization to facilitate an aggressive increase in allocations to offshore assets.

The opening of the pension giant's third offshore investment office, in Singapore, last week “is just the beginning,” said Choi Kwang, chairman and CEO of the fund.

In an interview in Singapore, Mr. Choi pointed to local sovereign wealth heavyweights Temasek Holdings and GIC Private Ltd. — with nine overseas offices each at last count — as examples of the path NPS could take.

The push overseas comes as Jeonju-based NPS seeks higher returns through “increasing allocations to higher risk assets,” maximizing diversification and reducing exposure to local fixed income, said Hong Wan Sun, the fund's chief investment officer.

The fund's June 30 total of 496.2 trillion won ($421.7 billion) represents a 5.6% rise in the past six months. After accounting for more than $2 billion a month in contributions from the salaries of Korean workers nationwide, the investment gain would be far lower.

NPS reported a 5.25% return for the year, below the annualized 6.21% gain since the fund's launch in 1988. At year-end 2014, allocations to domestic fixed income slipped to 55.5% from 56.1%, while overseas equities rose to 12% from 10.4%, and alternatives — domestic and overseas — climbed to 9.9% from 9.4%.

Over the coming five years, the fund's allocations to overseas equities should rise to 20%, from 13% as of June 30, while allocations to overseas alternatives will rise to 9% from 5%, said Mr. Hong, in remarks at the opening ceremony for the Singapore office.

Mr. Choi said NPS' next move into alternative strategies will be to hedge funds, with initial mandates to be awarded to hedge funds-of-funds managers. He declined to say how big a hedge fund allocation would be needed to have a material impact on the fund's investment returns.

The overall weight of offshore investments should reach 30% by 2020, said Mr. Hong. An NPS news release on the Singapore office opening said that as of June 30, 22.5% of the fund's assets were invested offshore, up from 21.8% at the end of 2014.

With the Singapore office facilitating market intelligence and partnerships with other sophisticated investors, “Asia will be a core growth area” — on track to expand its current weight of 17% of NPS' offshore investments, he said.

The U.S. and Europe account for 72% of those investments now, but “Asia is the future,” Mr. Hong said in his remarks.

The move to Singapore comes four years after the opening of NPS' first overseas office in New York, and three years after its second office in London.

Mr. Choi said while he can't say yet where or when NPS will open its next offices, expanding the organization's footprint will be a key to effectively deploying the fast-growing fund's assets.

With the contribution rate for the fund standing at 9% of workers' annual salaries, NPS' assets “will be $1 trillion in less than 10 years,” said Mr. Choi during an interview in Singapore. “How can you manage (that) amount of money with only three foreign offices?”

Kim Jee-Yeon, formerly NPS' team leader of investment management in Seoul, was named head of the Singapore office. She will be supported by three investment professionals, with plans to gradually add staff, including local hires, an NPS spokesman said in an e-mail.

NPS' assets are projected to peak at $2.3 trillion around 2043 but Mr. Choi said potential moves to bring the contribution rate for Korean workers closer to the OECD average of 18% to 19% could make the fund even bigger. If the rate were lifted to 15%, for example, NPS' peak assets could be closer to $4 trillion, he said.

Mr. Choi said NPS' continued overseas expansion will be key, as well, to its ongoing efforts to build extensive internal management capabilities.

NPS has hired 40 internal portfolio managers this year, adding to a lineup that came to 162 at the end of 2014, the spokesman said in the e-mail.

The total should exceed 230 by the end of 2015, he said. Overall staff, meanwhile, is projected to grow to 291 from 212 this year.

Mr. Choi said his ambition in building internal capabilities is no less than to be able to compete, as well as partner, with top external money managers, such as J.P. Morgan Asset Management, Goldman Sachs Asset Management and KKR & Co. LP.

Analysts, however, cited two big hurdles to NPS achieving Mr. Choi's goals: money and lifestyle.

The challenge public entities have in offering competitive compensation is a perennial one.

More unusual is the lifestyle issue — resulting from NPS' ongoing relocation to Jeonju, more than two hours from Seoul, as part of a government-mandated effort to reverse the overconcentration of the country's economic and governmental operations in the capital.

With that move scheduled over the coming year or so, many people “are concerned NPS will lose investment professionals,” noted one Seoul-based analyst, who declined to be named.

Mr. Choi said for an organization poised to become global, increasingly the issue won't be one of choosing between Jeonju and Seoul. “We will recruit very able persons, and then we'll send them — as many as possible — to overseas offices,” he said.

Meanwhile, on the topic of paying competitive salaries, Mr. Choi said it's an issue he's been discussing with government officials, and that progress has been made. “By the end of next year, our compensation levels will be top levels within Korea,” he said.