Increased investment in alternative assets by South Korean pension funds and other institutions in the wake of the National Pension Service (NPS) could result in poorly diversified portfolios as a whole, making them more vulnerable to specific risk, warned a report released by the National Pension Research Institute (NPRI) on September 9.
Alternative assets managed by the NPS – which is the country’s biggest state pension fund with 752.2 trillion won ($632.8 billion) in assets under management at the end of June 2020 – have expanded to 90.4 trillion won ($76 billion) or 12% of the total assets, up from 54.6 trillion won in 2015. It plans to increase its allocation in the asset class to 15% by 2024.
NPS is followed by the Korea Investment Corporation, the country’s sovereign wealth fund, whose allocation to alternative assets stood at $24.5 billion, or 15.6% of the total assets, in 2019 – up from $21.5 billion a year earlier.
Investment in the asset class by the Korean Teachers’ Credit Union, the second largest pension fund in the country after the NPS, also increased to 18.2 trillion won ($15.3 billion) or 55.2% of the total assets, as of the end of June 2020, from 12.4 trillion won at the end 2017.
South Korean investors’ larger allocation to alternative assets, such as private equity, real estate and hedge funds, is consistent with the broader trend. Global alternative assets under management topped $10 trillion as of the end of June 2020, up tenfold over the last 10 years, as investors on the hunt for yield flock to the asset class amid the global economic downturn and low interest rates, according to research firm Preqin.
NPS is relatively more experienced and has expertise in the asset class as it has enhanced its alternative investment teams since 2010, but that doesn’t appear to be the case for many of the other large investors in the country, the NPRI report said. As a result, there have been several cases where some of them chose to follow the NPS when making investment decisions, the report added.
“If this phenomenon continues with more money allocated to alternative assets, portfolios of South Korean institutional investors could be skewed towards only a few investment assets from a nationwide view, which raises concerns about poor diversification,” the report said.
“Investors should be cautious when making investment decisions because most of the investments in alternative assets are long-term ones and highly illiquid,” the report said. “They also should consider risks related to political conditions, especially investing in alternative assets in emerging markets.” (Reporting by Hee-yeon Han)