Korean pension fund taps won rally to invest abroad as yields slump
Retirement fund eyes investment properties in US as won strengthens against dollar
One of South Korea’s biggest retirement funds is taking advantage of a stronger won to boost returns by snapping up real estate overseas and trimming lower-yielding domestic bonds.
The Government Employees Pension Service (GEPS) is looking at properties in the US after investing in buildings in Australia and Belgium, according to its chief investment officer. The won’s 3.4 per cent gain against the US dollar this quarter is the best performance in Asia, and the currency is up 7.3 per cent in the past year, second only to the yen. That’s a boon for GEPS as it seeks to increase overseas investments to 20 per cent of total assets this year, from 16 per cent, and to 30 per cent in five years.
“We have to go overseas when the won is strengthening,” Choi Young-gwon, who oversees the fund’s 5.4 trillion won (US$4.8 billion) of assets, said.
GEPS follows the nation’s largest retirement vehicles, the National Pension Service and Korea Teachers Pension, in building a diverse global portfolio to meet higher payouts to an ageing population that curbs potential economic growth. The fund’s target of a 4.5 per cent return over five years has become harder to achieve with domestic bonds yielding less than 1.5 per cent, boosting the allure of alternatives such as real estate.
“When your target return is set and expected return is measured, all seems to point to alternative investments,” Choi said. “Between domestic and offshore alternatives, I prefer offshore ones as domestic options are limited and harder to exit.”
While a strategist survey puts the won 4.4 per cent weaker by the end of the year at 1,165 per dollar, ING Groep – the most accurate forecaster in Bloomberg’s latest rankings for the currency – sees little more than a 1 per cent slide to 1,130. A smaller drop would help pension funds continue their overseas acquisitions.
The country’s Statistics Office estimates the proportion of South Koreans aged 65 and above will climb from 13 per cent to 40 per cent by 2060. Asia’s fourth-largest economy’s potential growth rate will decline to 2 per cent between 2026 and 2030, from about 2.7 per cent now, according to the Hyundai Research Institute, a private think tank.
South Korea’s sovereign bond yields are near record lows reached in July after a prolonged export slump prompted the central bank to cut its policy rate to an unprecedented 1.25 per cent in June. Sixteen of 24 economists surveyed by Bloomberg predict another reduction by December. The nation’s 10-year notes yield 1.42 per cent compared with 2.71 per cent in China and 7.12 per cent in India. In Asia, only Hong Kong, Taiwan and Japan offer lower yields.
“Because interest rates are so low, it is hard to achieve satisfactory returns from investing in bonds,” said Kim Byung-duck, senior fellow at the Korea Institute of Finance in Seoul. “That is why pension funds are looking overseas and to alternative assets to diversify their portfolios and boost returns.”
GEPS invested 50 billion won in a building in Canberra in April, following a similar purchase in Melbourne last year, according to Choi. Last month, it paid 50 billion won for a stake in the Astro Tower in Brussels. Alternative investments are expected to account for 24 per cent of its assets by 2021, 60 per cent of which would be overseas and the rest local, he said.
Domestic bonds are “a bit pricey”, Choi said, adding that their share of the fund’s assets will decline to 41 per cent by the end of the year from 44 per cent now. The proportion has dropped from 49.4 per cent at the end of 2013. The fund favours longer-dated securities and is looking forward to the proposed sale of South Korea’s maiden 50-year notes, he said.
The National Pension Service (NPS) aims to pump some of its 533 trillion won of assets into China, chief investment officer Kang Myoun-wook said this month, adding that it is also looking at putting money into India, where yields are the highest among major Asian nations. NPS said in May that it plans to boost its holdings of foreign securities and alternative assets to more than 35 per cent by 2021 from 24.3 per cent in 2015. Korea Teachers Pension said last year it will cut local bond holdings to allow it to diversify by adding overseas equities, bonds and alternative assets such as real estate.
“Every pension fund CIO is probably thinking hard about the same thing: how to achieve the target return in today’s low interest-rate environment,” Choi from GEPS said. “The volume of longer-term investments will rise, and asset allocation rather than individual stock selections will become more important.”