National Pension Service (NPS) Chief Investment Officer (CIO) Seo Won-joo speaks during a press conference in Seoul, Thursday. Korea Times photo by Anna J. Park
NPS logs 13.59 percent investment return in 2023
By Anna J. Park
The National Pension Service (NPS) plans to open up its fourth overseas office in San Francisco in the U.S. by the third quarter of this year, aiming to actively participate in more diverse alternative investment opportunities. The NPS currently operates three overseas branches in New York, London and Singapore.
“The NPS is internally planning to open up the San Francisco office within the third quarter. The reason that the NPS chose San Francisco as the destination for the fourth overseas office is that Silicon Valley has become a focal point for the most significant and trendy investments of today, including artificial intelligence (AI) and biotech, ” Lee Suc-won, managing director leading NPS’ Investment Strategy and Responsible Investment & Governance, said during a press conference in Seoul, Thursday.
Lee said it was necessary for the NPS to establish the office in Silicon Valley, home to many global IT and venture capital firms, to directly engage with these emerging areas of investment and be part of the inner circle of the local investment scene.
Given that the national pension operator’s key five-year term goals included further strengthening overseas alternative investments for the sake of diversifying its portfolio and enhancing profitability, having its own office in the region known to be the cradle of global alternative investments is only a natural step for the NPS.
Since 2021, other government-affiliated financial institutions, such as the Korea Development Bank (KDB) and the Korea Investment Corp. (KIC) have been operating offices in San Francisco. The NPS has also been preparing for the opening up of its office in Silicon Valley since last summer.
National Pension Service (NPS) Head of Investment Strategy Son Hyup, left, and Managing Director of Investment Strategy and Responsible Investment & Governance Lee Suc-won answer reporters’ questions during a press conference in Seoul, Thursday. Courtesy of NPS
“Local offices are central to swift decision-making in the latest investment trends,” Son Hyup, NPS’ head of Investment Strategy, said at the press conference, adding the NPS has been deploying alternative investment team leaders to each overseas offices.
As Son said, strengthening overseas alternative investments is key to the national pension fund’s strategy that seeks overall medium returns while bearing medium risks. Alternative assets mostly consist of private equity fund investments, infrastructure and real estate, such as global office buildings. They have many advantages compared to other assets, including a diversification effect, illiquidity premium and the ability to leverage negotiating power.
While the proportion of overseas investments out of the pension fund’s entire investment portfolio has increased from 19.3 percent in 2013 to 51.5 percent in 2023, it was driven largely by growth in alternative investments.
The NPS currently invests 139.5 trillion won ($105 billion) in alternative investments, or 15.9 percent of its total portfolio, yet the percentage is far lower than Canada Pension Plan (CPP), one of the world’s most successful pension funds, where the proportion of alternative investments takes up 65 percent.
“Among major pension funds worldwide, the NPS is regarded as one of the younger cohorts that is still in a growth phase. As the fund is still in the growth stage where sustaining investment is possible, the NPS seeks to actively pursue aggressive investment strategies by expanding the proportion of risky assets, aim to increase profitability and enhance returns through investment diversification,” Son said.
The head of investment strategy at the NPS also highlighted that increasing overseas investments while the country’s current account balance is in surplus can help the country prepare for the future when the current account balance will shift towards a deficit as the population ages further.
Need for more hiring
Another concern is that it takes more employees to manage alternative investments, and it is necessary to further expand its staff. The NPS increased the total number of employees to 480 by newly hiring 50 last year, but it is still lacking.
Currently, each fund manager at the NPS is estimated to manage about 2 trillion won on average. This is particularly larger than other major global pension funds, compared to CPP’s 300 billion won or ABP’s 1 trillion won.
As of the end of 2023, the NPS’ total asset size amounted to 1,035.8 trillion won, with an annual rate of return standing at 13.59 percent. It logged an investment return of 126.7 trillion won in the past year, which is about 20 percent of the government’s annual budget size.
In the period from 2000 to 2023, the NPS’ average return rate stood at 6.1 percent, which is considered a good performance when comparing with major global pension funds, including Canada’s CPP at 7 percent, Norway’s GPFG at 5.6 percent, the Netherlands’ ABP at 5.3 percent and Japan’s GPIF at 3.6 percent.