NPS Launches More Internal Management of Alternatives and Foreign Bonds | Asset owners

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Korea’s National Pension Service (NPS) is taking a more active approach to its fixed income and alternative investments by reducing the percentage of outsourced foreign bonds and creating a dedicated private equity and debt investment team.

The pension fund revealed the initiative in late August, at the same time as it revealed that its assets under management (AUM) had reached 908.3 trillion won ($ 780 billion) at the end of June, exceeding for the first time 900 trillion won, after a global stock market rally that generated a return of 7.49% in the first half of this year.

Return of the NPS in the first half of 2021 (Source: NPS)

By the end of 2022, NPS wants to have reduced the percentage of its foreign bonds managed by outsiders from 53.5% to 40%. He expects the plan to save 13 billion won ($ 11.2 million) in annual costs, his fund management committee said in a meeting with the Korean Ministry of Health and Welfare August 25.

The NPS has expanded its internal capacity to carry out the plan. In January, it expanded the overseas bond office by setting up two new overseas bond and credit teams respectively, the committee noted.

He also plans to create, perhaps by the end of September, a team dedicated to managing private debt and secondary transactions, a spokesperson said. AsianInvestor. Local media reported that the team will be called the Alternative Strategy and Investment Team and will be part of the Private Equity and Venture Capital investment division.

BE ECONOMICAL

NPS last disclosed on August 25 showed that its management and operating expenses increased by more than a fifth (21%) in four years, from 577 billion won in 2016 to 697 billion won in 2020. Expenses in the first half of this year year have already reached 365 billion won.

In addition to a reduction in fees, NPS hopes that more active management of foreign bonds will help it achieve higher yields and more liquidity, if it were to react quickly to sudden market swings by selling assets. stable and buying cheap foreign stocks and alternative assets.

Source: NPS (Click for full view)

The pension fund’s foreign fixed-income positions – a total of 52.4 trillion won – represented 5.8% of its assets under management at the end of June. These consisted of 43.8% government bonds, followed by 24.1% corporate bonds, 17.7% government-linked bonds and 14.4% securitized debt. .

More than half of these assets were managed by 16 companies at the end of June. They include Brandywine, Macquarie, Franklin Templeton, Morgan Stanley Investment Management, PIMCO, Prudential, Allianz Global Investors, TCW, The World Bank, T. Rowe Price and JP Morgan Asset Management.

“NPS’s internalization of overseas bond management is in line with industry trends,” said Diego López, managing director of Global SWF, a data platform that tracks sovereign wealth funds and public pension funds.

“Public investors try to compensate for their concentration in private markets, which are normally managed from outside, by tighter control of their investments in public markets. As a result, an acceptable level of fees can be paid to external parties in alternative investments instead, ”he said. AsianInvestor.

DIFFICULT ALTERNATIVES TO GO

At the end of June, 170 asset managers were responsible for managing some 70 trillion won of NPS ‘alternative overseas investments, the fund revealed on August 25.

His decision to launch a dedicated private debt and equities team came after a program to recruit 54 investment managers launched in April, with around half of the positions in private markets.

READ ALSO : NPS Launches Investment In Recruitment To Close Brain Drain

NPS alternative assets represented only 10.7% of assets under management at the end of February and fell further to 10.4% at the end of June, despite an increase in the amount of 90.7 trillion won to 94.6 trillion won (81 billion of dollars).

In 2017, he set a target of increasing alternative assets to 15% of the portfolio by 2022. The deadline has since been extended until 2025, with a new target of 13.2% by the end of the year. end of this year also in place.

Source: NPS (Click for full view)

In its latest public dossier, NPS attributed the decrease in the proportion of alternative investments to “poor execution and an overweighting of public assets”.

Like most pension funds, global stocks were the best performers in NPS ‘portfolio in the first half of the year, returning 17.7% for foreign stocks and 15.6% for domestic stocks, both beating the KOSPI (up 14.7%) and the MSCI ACWI ex-Korea (up 12.9%) benchmarks.

In contrast, alternative assets only returned 4.97%, most of which was interest, dividends and transaction gains. OFixed income verseas contributed 2.27% as the won-dollar exchange rate rose, while domestic bonds lost 1.16%.

“Keep in mind that financial markets have reached all-time highs, which means that the value of stocks continues to rise and its relative weight in the overall pie is even more difficult,” said López of Global SWF.

“If NPS manages to deploy enough capital and the financial markets undergo a significant correction, the year-end target could still be met, but that seems difficult,” he noted.


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