Korean pension funds raise bets on infrastructure, global stocks

South Korean pension funds are raising their bets on infrastructure and global stocks, while reducing exposure to the domestic stock market on a downward streak following President Yoon Suk Yeol's martial law decree and impeachment in December, according to their senior asset managers.

The rapid adoption of artificial intelligence is expected to create handsome returns from data centers and other AI-related infrastructure, offsetting lower expected returns from other asset classes amid falling interest rates. 

Korean pension and savings funds are inclined to take more risks by resuming investments in mezzanine and subordinated debts beyond senior loans and buyout deals, their investment managers told The Korea Economic Daily early this week.

INFRASTRUCTURE

The National Pension Service (NPS) decided to create an infrastructure solution team after a year-end organizational reshuffle in 2024. The team is dedicated to infrastructure secondary deals and lending.

In October, its Chairman Kim Tae-hyun said the world's No. 3 pension scheme was looking to ramp up investment in value-added, secondaries and mid-market deals in the infrastructure sector.

“As the boundaries between private equity and infrastructure are blurring, we’ll invest in infrastructure as a type of private equity investment,” said a Korean institutional investor.

“We’ll make project investments in infrastructure, seizing the opportunities to be created by the strong demand for AI,” he added.

Sovereign wealth fund Korea Investment Corp. is considering investing in spacecraft manufacturer SpaceX and OpenAI as part of its AI investment.

STOCKS

The NPS, Teachers’ Pension and Government Employees Pension Service (GEPS) are bullish on global stocks.

The NPS will increase the weighting of global stocks to 35.9% from 33% of its portfolio and pour an additional 58 trillion won ($39 billion) into them in 2025. It manages 1,146.1 trillion won in assets as of the end of the third quarter.

Teachers’ Pension and GEPS will lift the proportion of global stocks by 2.9 percentage points and 1.6 percentage points, respectively, by the end of this year.

Global stocks created a whopping 26.5% return for the NPS in the January-October period of 2024, more than double the average of 11.3% of its portfolio in the same period.

By contrast, domestic equities yielded a negative 0.8% return in the corresponding period. In 2023, the pension scheme logged a record-high return of 13.59% thanks to robust stock markets.

As their assets grow, investment experts advise Korean pension funds to further scale back exposure to domestic stocks, which make up a meager 2% of global stock markets in terms of market capitalization.

PRIVATE CREDIT

The NPS and other major Korean retirement funds will also step up their bets on private credit to earn a steady stream of income.

In 2024, the NPS, Military Mutual Aid-Association and KBIZ Korea Federation of SMEs set up private credit investment teams.

“With interest rate falls, mutual savings associations will increase mezzanine lending again,” said Park Yang-rae, chief investment officer of the Korea Scientists and Engineers Mutual-Aid Association.

He said the investment environment would be more challenging in 2025 than in 2024 when it could pocket decent returns with little downside risk.

Over the past few years, senior loans yielded more than a 6% return, slightly above the annualized average return of 5% promised by Korean retirement funds to their subscribers.

Korea Post is considering committing about 200 billion won ($136 million) to a buyout fund, instead of pumping money into a mezzanine fund, anticipating that lower interest rates will revive the M&A market.

FOREIGN EXCHANGE RISK

The weaker won, or strengthening dollar, may bode well for their global assets, but at the cost of growing volatility in investment income.

“Unlike pension funds that do not face redemption requests, mutual aid funds are more sensitive to performance volatility because our members can drop out any time," Huh Jang, CIO of the Public Officials Benefit Association, told The Korea Economic Daily.

"As emerging currencies are trending downward, we’ll step up foreign exchange risk management,” he said.

The NPS is expected to hedge the foreign exchange risk for 10% of its global assets, or $48.5 billion, under its portfolio management guideline.

Accordingly, it will likely sell dollars on the forward market at an exchange rate of around 1,470 won to the greenback. The won plummeted to 1,467.5 won last week -- a level not seen since the 2009 global financial crisis.

Write to Byung-Hwa Ryu at hwahwa@hankyung.com
 


Yeonhee Kim edited this article.