Korean pension fund taps won rally to invest abroad as yields slump

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.