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[Korean Money Going Abroad] NPS to slash net increase in Korean stock investment by 95% in 2017

Jun 22, 2016 (Gmt+09:00)

South Korean investors, led by the National Pension Service (NPS), have been ramping up overseas investments while trimming domestic portfolios, a move that prodded domestic brokerage firms to bolster overseas sales operations, while slimming down local corporate sales staff.

Last year, five key savings funds in South Korea, including Korea Teachers’ Credit Union (KTCU), spent a combined 111.6 trillion won ($97 billion) in overseas investments, about a tenth of the domestic stock exchange’s market value. The investment amount represented a 25% rise from 2014.

Also, NPS and the five savings funds - KTCU, Military Mutual Aid Association (MMAA), Public Officials Benefit Association (POBA), Scientists and Engineers Mutual-aid Association (SEMA) and Police Mutual Aid Association (PMAA) - put a record 40.2 trillion won ($35 billion) on aggregate in overseas alternative investments last year, up 28.0% from 2014.

The five major savings funds are planning to boost overseas investments further - equities and alternative assets - by about 30% on average in 2016 from a year ago, shying away from languid domestic equities and bond markets. (For details, see the table below.)

“Considering dividend yields, potential growth rates, currency values and other factors, there is little reason to invest in domestic markets,” said Soong-chul Koh, head of equities at South Korea’s Teachers Pension, a pension service provider for private school personnel.

“To increase our clients’ retirement assets, we must find investment assets that generate more than savings rates,” Koh added. “But we cannot find an answer from Korean markets.”

Domestic pension and savings funds are increasingly looking to core office buildings in advanced markets, offshore hedge funds and new types of investments such as catastrophe bonds, as well as diversifying into emerging markets, in pursuit of 5~6% returns a year.

They are expecting that returns on foreign investments will continue to beat domestic ones, although the rate of returns may not be as much as the previous years’.

“In advanced markets, we expect to make stable returns, although not high,” said Sangho Lee, the CIO of the MMAA. “In the case of Vietnam, we expect it will post a rapid growth as did Korea in the 1960s and 1970s.”

NPS, the world’s third-largest pension fund, will boost the net increase amount of overseas stock investments by 45% to 15.63 trillion won ($13.5 billion) next year from this year’s planned 10.8 trillion won. By contrast, it will slash the net increase amount in domestic equities investments by 95% to 200 billion won ($173 million) in 2017, compared with this year’s 4.1 trillion won. Assets under management at the NPS have been swelling by more than 40 trillion won a year.

KCTU plans to allocate 13.8% of its AUM, or 5.1 trillion won, to overseas alternative investments by 2019.

Overseas Alternatives



Retail investors followed suit. According to the Korea Securities Depository, foreign stock transactions by South Korean investors, including individuals and proprietary investments by brokerage companies, jumped by 78.4% to a record $14.0 billion last year from $7.9 billion in 2014. The figure compared with $2.9 billion in 2012.

Foreign stock funds also saw heavy inflows of money. Last year publicly-offered foreign equities funds drew 2.2 trillion won, in a stark contrast to the outflows of 4.4 trillion won from domestic equities funds during the same period. (For property and bond investments, see the following table.)

Fund investments


“Now, alternatives to Samsung Electronics are not LG Electronics or SK Hynix, but Apple, Xiaomi and the like,” said Dae-seok Kang, the CEO of Shinhan Investment Corp. “Overseas investments are picking up remarkably, so it is possible that ‘Mrs. Kim’, like Mrs. Watanabe in Japan and Mrs. Sophia in Europe, may gain currency internationally.”Meanwhile, a South Korean home loan provider under the land ministry, which manages 115 trillion won in assets, withdrew about one third of its domestic equities portfolio last February, or 1 trillion won of the outstanding 3.4 trillion won. The state-run agency plans to use the redeemed money to buy overseas exchange-traded funds.

Hit by lackluster domestic stock markets that have been stuck in a narrow range of 1,800 and 2,150 for five straight years, and anemic economic growth in South Korea at a 2% level a year, returns on domestic equities in 2015 fell short of those on overseas alternative investments at the NPS and other major institutional investors. (for details, see the following table.)

Investment Returns


The country’s five largest brokerage companies, based on equity capital, saw their corporate sales divisions, which arrange domestic stock trading of institutional investors for fees, turning to losses in May.

“Over the past 10 years, it was only five days when the daily trading value of local institutions in the stock markets fell below 1 trillion won. Two of them happened last month (May 20 and 26),” said an executive of a domestic brokerage’s corporate sales division. “In such a circumstance, we cannot earn our bread.”

On May 26, news was released that the NPS will slash the net increase amount of domestic equities investments by 95% next year from this year’s.


The growing presence of pension and savings funds in domestic financial markets restricts their leeway in local portfolio management, because their redemption puts a big dent on the broader markets.

Also, institutions that make handsome returns on investments in local infrastructure such as express way, tunnel and subway line sometimes end up with appearing at a parliamentary audit and being scolded for their so-called “tax theft”, because of a public outcry over the hefty returns.

“In a lack of understanding that our high returns will be funneled into the retirement coffers of our fellow citizens, domestic contracts are often breached, so it is safer to invest abroad,” said a source of an institution that participated in a South Korean infrastructure project.

In line with growing demand for offshore assets, NH Investment & Securities and two other South Korean brokerage firms are increasing hires for overseas investment research, whereas downsizing or relocating local corporate sales staff to other divisions.

Domestic brokerage and asset management firms are also poaching seasoned managers or an overseas investment team itself from a competitor. Overseas stock brokerages lead to higher fees and currency exchange fees.

Samsung Securities, a leading brokerage house in South Korea, launched a research team last December in charge of introducing and analyzing a variety of foreign investments and setting investment strategies. Further, the securities house expanded overseas stock research staff to 25 from 10 in the same month.

Local investors are poised to continue to pour in overseas investments, including foreign bonds, amid the prospects that South Korean companies subject to creditors-led restructuring may suffer further downgrades in their credit ratings. They are now expanding their bond portfolio from U.S. Treasuries and American corporate bonds to emerging market debts, willing to bear currency risks, local asset managers said.

Some local institutions, however, express concerns about rising overseas investments which may in turn shrink the country’s financial markets, including primary corporate bond markets.

“Junior staff think that they can make a better career management if they work in overseas investment teams, so they will have a high chance of getting job offers,” said a source at a local asset management firm. “Now talented staff is rushing into overseas business, the domestic business side is left out in the cold, relatively.”

By Hyunjin Lee/Woosup Kim

Yeonhee Kim edited this article

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