Drain of talent hampering Korea NPS' investing effort

An exodus of investment talent at Seoul-based National Pension Service — ahead of the end-of-February deadline for relocating NPS staff to the South Korean countryside — could hamstring the 545 trillion won ($462 billion) pension fund's near-term efforts to deploy net inflows exceeding $4 billion a month.

Longer term, NPS' move to the rustic setting of Jeonju, a roughly three-hour drive from the capital, could hobble its prospects for assembling and retaining a world-class team to manage a portfolio set to exceed $1 trillion in assets by the middle of the coming decade, market veterans say.

The marching orders the national pension fund is following this year are part of a long-standing government effort to ease the overconcentration of the country's economic and administrative activities in Seoul.

While the policy is affecting a broad range of ministries and government-linked entities, the distance from the capital of NPS' new home has left the challenges facing the fund looming particularly large — both for its employees and the money managers at home and abroad running mandates for the fund or hoping to do so.

By comparison, the move by various ministries and quasi-government-linked funds, such as Korea Post Bank, to the country's new administrative capital of Sejong, a little more than an hour from Seoul, has been less onerous.

On top of a long-standing reputation for relatively low compensation, the move to the hinterlands will add a second strike against NPS in the eyes of current and prospective employees, market veterans say.

Offsetting those negatives, said Hyun-Chang Huh, an NPS spokes-man, in an email, is a sense of national service — with NPS staff “proud to manage the assets of the Korean people.”

On that score, some market veterans point to the shadow hanging over NPS' public image as a result of the indictment in January of NPS Chairman Hyung Pyo Moon as a further blow to employees' esprit de corp. Mr. Moon allegedly pressured NPS executives, in his prior capacity as head of the ministry overseeing the fund, to approve a 2015 Samsung Group restructuring criticized as favoring the conglomerate's founding family.

Mr. Huh said recent improvements in compensation have made the salaries of NPS employees competitive with what they can get from local money management firms. He conceded, however, that room remains for further discussion of changes to ensure the compensation system matches the expertise of investment professionals “in managing the world's third-largest fund.”

And on Feb. 28, NPS' investment management committee, chaired by the minister of health and welfare, agreed to request sufficient additional funding from the Finance Ministry to make manager compensation top quartile by private industry standards. It remains unclear at this point how the Finance Ministry will respond, an NPS spokeswoman said in a March 1 interview.

In the run-up to the move to Jeonju, NPS employees have been voting with their feet.

About 20 investment professionals have left NPS since the start of 2017, said one source familiar with the national pension fund who declined to be named.

That acceleration, from 30 departures for all of 2016, has left the fund's investment team numbering roughly 200, down from 223 at the start of the year.

Some of those departing NPS veterans have landed jobs with local and overseas money managers or pension funds, including:

nKyung-Jik Lee, the head of the fund's public international securities investment division, who put in his resignation in recent weeks to join Boston-based Wellington Management Co. LLP in Hong Kong as head of that firm's Korean sales efforts;

nYoon-Pyo Lee, an eight-year NPS veteran and head of the fund's investment strategy division, who left in mid-2016 to join Seoul-based Truston Asset Management as co-CEO;

nChangsuk “Jade” Ok, a six-year NPS veteran and head of the fund's global infrastructure investment team who left in November to become a managing director and head of alternative investment at Trust-on; and

nYoung-Soo “Erika” Oh, a senior portfolio manager and former head of the first overseas office NPS opened in New York in 2011, who left in January to join the $7 billion, Seoul-based Government Employees Pension Fund as head of international investments.

Details could not be learned by press time on whether other outgoing NPS veterans have landed new jobs — including Sang-Hyun “Brian” Yoo, the head of international alternative investment division who resigned in recent weeks, and Wesley Koo, the head of the fund's London office, who left in November.

One financial services executive, who declined to be named, cited talk that with an April government audit scheduled — which could prove especially brutal in the wake of the Samsung scandal — NPS has delayed accepting the resignations of executives such as Kyung-Jik Lee. The executive surmised it is a formality as Mr. Lee appears to have been on the right side of every decision related to the Samsung matter.

NPS' spokesman Mr. Huh said as of Feb. 24, Mr. Lee continues to serve as NPS' head of global public markets.

Neither Mr. Lee nor Mr. Huh responded to emailed questions regarding whether NPS has declined to accept Mr. Lee's resignation.

Money managers have a lot at stake in the continued smooth operation of South Korea's largest institutional investor.

“Every night I go to bed and say, "What have I done for NPS today?'” said Ryan Changwon Kim, executive director and chief representative of Korea for Robeco Institutional Asset Management BV Korea. Robeco affiliate Boston Partners manages an undisclosed amount in international equities for NPS.

While money managers and investment consultants say enough of the fund's investment team remains in place to maintain NPS' pace-setting status among Korean investors for now, many fear the instability is set to continue.

“People might not leave immediately,” but after six months of plumbing the depths of Jeonju's karaoke bars, they may have second thoughts, predicted an executive with one of NPS' external managers, who declined to be named.

One veteran market analyst, who likewise declined to be named, predicted the fund's high level of turnover and looming audit would effectively bring new mandates, especially in private markets, to a halt for a year or more — a move that could effectively favor current managers in line to receive a succession of top-ups on existing allocations.

Longer term, NPS' move to the countryside — which will find many of the fund's investment professionals opting to maintain a second home in Jeonju rather than move their families from Seoul — will sharply reduce the odds of finding “good people in their late 40s and early 50s for those division head positions,” said the market analyst.

In a September 2015 interview with Pensions & Investments, previous Chairman and CEO Choi Kwang had predicted the pending move to Jeonju wouldn't pose insurmountable problems. He said NPS' operations — and staffing — would increasingly be focused on the fund's overseas offices in financial centers such as New York, London and Singapore.

The fund reported allocations, as of Nov. 30, 2016, of 51.5% domestic fixed income, 18.2% domestic equities, 14.8% overseas equities, 11% to alternatives, 4.2% overseas fixed income and 0.3% cash and “others.”

The fund's midterm plan calls for boosting total equities exposure to around 45% by 2021 from their current weight of 33%, at the expense of fixed income.

Andrew Shin, Seoul-based director, head of investment services, Korea, at Willis Towers Watson PLC, said Mr. Choi's argument could hold water, provided NPS takes steps to further enhance the decision-making powers of those overseas offices in areas such as private markets investments.

For now, with final decision-making for NPS' growing private markets allocations still largely reserved for the fund's headquarters, NPS' leadership has to grapple with the possibility that the “talented people” the fund's leadership rewarded with overseas assignments might be reluctant to return to Jeonju, said Mr. Shin. He cited the recent departure of London head Mr. Koo as an example of the kind of “high-caliber” loss fund leaders should be anxious to avoid.