South Korea's National Pension Service will take on more risk over the coming five years to maintain an annualized return target of just over 5%.
Minister of Health and Welfare Park Neung-Hoo, who is chairman of the NPS fund management committee, this week announced a 5-percentage-point shift to overseas equities from domestic bonds for the 737.5 trillion won ($597.6 billion) Jeonju-based pension giant's asset allocation targets through 2025.
The committee updates those five-year targets every year.
The latest targets call for NPS to invest 35% of its portfolio in overseas equities by 2025, up from last year's 30% target for 2024. The pension fund is aiming for a 22.3% weighting by the end of 2020.
That shift comes at the expense of domestic bonds, which will now aim for a 25% portfolio weighting by 2025, down from last year's 30% target for 2024. By the end of the current year, domestic bonds are slated to account for 41.9% of NPS' portfolio.
The latest update leaves five-year allocation targets for domestic equities and alternatives unchanged from the year before at 15% each. For 2020, those asset classes target weightings of 16.8% and 13%, respectively.
Likewise, the target for overseas bonds remains unchanged at 10% by 2025 — almost double this year's 5.5% weighting target.
As of Feb. 20, NPS reported allocations of 44.5% to domestic fixed income, 22% to global equities, 16.6% to domestic equities, 11.9% to alternatives, 4.7% to overseas bonds and 0.3% to short-term assets.
The updated allocation guidelines should allow NPS to achieve an annualized rate of return target of around 5.2%, in line with the 5.21% average annualized return the fund has delivered since its establishment in 1988, Mr. Park said in an announcement on the ministry's website.
He warned, however, that with the huge fallout from the COVID-19 crisis forecasting the outlook for financial markets and long-term economic trends is unusually tricky now. Mr. Park added that NPS will actively monitor and respond to market changes, diversifying its investments and taking a long-term stance in managing through the post-COVID-19 period.
NPS is not the only pension fund giant moving this year to trim its reliance on sovereign bonds at a time when aggressive central bank stimulus policies around the globe have driven bond yields down to zero or below.
At the end of March, Japan's Government Pension Investment Fund, Tokyo, announced an asset allocation update, slashing its ¥169 trillion ($1.6 trillion) portfolio's target allocation for domestic bonds to 25% from 35%. The pension fund updates its asset allocation every five years.