Alternative investment by South Korea’s National Pension Service (NPS) has increased by more than three trillion won in the six months to June 2019, though this was not enough to meet the pension fund’s target allocation.

The public pension fund’s investment in financial assets has grown by 56.9 trillion won to 695.7 trillion won during the six months ended June 2019, according to the latest report from the National Pension Research Institute.

Gains on valuation of investments, worth 39 trillion won, accounted for the largest portion of the increase, followed by new investments worth 11 trillion won and realized gains worth seven trillion won. Overall, the share of investments in equities and overseas bonds has risen, while the share of investments in domestic bonds and alternative assets has fallen.

NPS’ investment in alternative assets stood at 80.3 trillion won as of June 2019, up 3.7 trillion won compared to six months earlier. Investments in all types of alternative assets, including private equity, real estate and infrastructure, have increased during the first half of last year. Specifically, investments in overseas real estate, private equity and infrastructure sat at 23 trillion won, 16.5 trillion won and 14.9 trillion won, respectively, while domestic infrastructure and private equity represented investments of 8.1 trillion won and 7.8 trillion won.

Still, the overall allocation to alternatives remains below the pension fund’s target.

NPS has a 12.6 percent target allocation to alternatives, but the actual allocation to alternative assets was 11.5 percent as of the end of June 2019, 1.1 percentage points lower than the desired level. That is a result that contrasts with the pension fund’s mid-to-long-term plan to enhance investment returns by increasing its allocation to equities and alternatives and reducing allocation to domestic bonds at the same time.

The report attributed a slow growth of the pension fund’s investments in alternatives to two factors: an increase in exits from older investments and a slow rate of deployment into new investments. Especially, the latter was largely due to growing competition in alternative investment markets as well as inefficiency in the pension fund’s internal process, the report pointed out.

The NPS investment committee last year approved measures to improve its internal structure and process, including dividing its alternative investment division into smaller teams by asset type and adopting a fast-track route for alternative investments. “We need to wait and see whether these efforts will lead to increased allocation to alternative assets,” the report said.

In the first six months of last year, alternative assets produced returns of 4.24 percent, with returns on domestic and overseas alternative investments at 1.28 percent and 5.58 percent, respectively. By asset type, overseas hedge funds produced the highest returns at 8.19 percent, followed by overseas private equity at 6.11 percent, overseas infrastructure at 5.88 percent, overseas real estate at 4.86 percent, domestic infrastructure at 2.85 percent and domestic real estate at 1.84 percent.

However, these figures have not been revalued to fair value, which is done once a year around September, the report explained. Indeed, according to the latest data from the NPS, returns on alternative investments sat at 9.62 percent as of the end of December 2019.

For the six months to June 2019, the NPS has been cash flow negative on its alternative investments largely due to increased contributions to overseas alternatives. Distributions from the pension fund’s alternative managers for the next five years are expected to amount to more than 70 trillion won, with the portion of overseas alternatives expected to account for nearly 80 percent of the amount.

As of the end of December 2019, the NPS had about 736 trillion won assets under management, of which alternative investment accounted for 11.5 percent, or about 84 trillion won. (By Han Hee-yeon)