South Korean pension funds, including the National Pension Service (NPS), are incurring the anger of retail investors after a stocks sell-off lasting more than 30 days.  

Pension funds had net sales for 35 consecutive days in the main Kospi market from December 24 to February 16, the longest this has happened. They cumulatively sold 11.8 trillion won ($10.6 billion) worth of stocks, more than three times the net sales of 3.4 trillion won recorded last year. Pension funds began to sell stocks aggressively last June, dumping more than 18.0 trillion won worth of shares in eight months.

Retail investors, who have aggressively purchased local stocks, are worried that the market will stop rising or even fall due to the aggressive selling by pension funds. Some investors recently began to post petitions on an online bulletin of the presidential office of Cheong Wa Dae demanding that the government prevent the pension funds from selling stocks by improving their investment policies.

Retail investors bought a net 47.4 trillion won worth of shares last year, driving the country’s benchmark index above a record 2,800. They are continuing to flock to the market this year on expectations of further rises despite the pension funds’ sell-off.  

The non-stop sell-off is not in line with their usual trading patterns. Like other institutional investors, pension funds generally offload stocks to adjust portfolios when the market looks to be overheating, while buying stocks deemed cheap when an adjustment period begins. However, the funds have been selling regardless of the index’s movement. They even sold stocks instead of buying when the Kospi fell temporarily below the 3,000 mark at the end of last month.

Analysts expect the sell-off to continue, attributing it to efforts by funds to reduce the share of domestic stocks in their portfolios so that they can expand overseas investment to maximize returns and diversify risks during the Covid-19 pandemic.

NPS, one of the world’s largest pension funds with 800 trillion won of assets under management, has said it wants to increase the overseas investment ratio in its portfolio from the present level of around 30% to 50% by 2024.

“The Annual Investment Plan that NPS has to follow also seems to force NPS to sell stocks irrespective of its willingness,” a stock market analyst said.

It is implementing a strategic target outlined in the mid-term plan that is based on domestic and international investment conditions and portfolios as well as the target allocation ratio and risk tolerance by asset, according to the NPS website.

Last year, NPS lowered its target allocation ratio of domestic equity to 17.3%, but with the ratio already exceeding that target and the Kospi rapidly rising, it seems to have had no choice but to sell domestic stocks. NPS allows the ratio of each asset to rise to 5% points higher than the target, but this allowable range has now been exceeded.

“The strategy to sell assets that have risen significantly, like current domestic stocks, and buy assets that have lower prices helps strengthen the long-term performance,” said a NPS source in a media interview.

Given that the local share target weighting has been set at an even more conservative target of 16.8% this year, NPS is unlikely to stop selling domestic stocks for the time being, analysts predicted. Some even expect NPS to sell another 30 trillion won worth of stocks this year to meet its target.

NPS posted a 6.49% return on investment at the end of November on robust performances in domestic and overseas stock markets, with 20.39% from the local stock market and 8.36% from investments in overseas stocks.

However, local stocks have recorded an average return of 7.31% and offshore stocks 9.71% since the fund was established in 1988. (Reporting by Capital Connect staff)

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