National Pension Service Only Gave Foreign Investors the Chance to Sell High and Exit [Economic Insight]

"A tower built over ten years has collapsed. Over the past decade, the National Pension Service (NPS) steadily reduced its domestic stock allocation by 0.5 to 0.8 percentage points each year, bringing it down from over 20% to the 14% range. Then suddenly, they abandoned this principle and raised it back up to 20.8%."

This is what Jae-Hyun Bae, Chief Investment Officer (CIO) at Prism Investment Advisory, who was in charge of asset allocation work at the NPS Investment Strategy Office for about 12 years since 2013, said in an interview with The Asia Business Daily on June 30.

After the KOSPI index surged last year, the NPS raised its domestic stock target allocation from 14.4% to 14.9% in January this year, and decided to defer rebalancing until the end of June. In May, it drastically increased its domestic stock target allocation to 20.8%. Due to the sharp rise in stock prices, the allocation of domestic stocks exceeded the target, but the NPS was prohibited from selling stocks out of concern that it might adversely affect the market. There are also claims that the rebalancing was deferred until the end of June because of the June 3 local elections.

While the NPS deferred rebalancing due to political considerations and other factors, foreign investors—another major player in the KOSPI market—continued to rebalance. In the first half of this year, foreign investors made net sales of KRW 149 trillion worth of stocks on the KOSPI market, while individuals made net purchases of KRW 99 trillion and institutions purchased KRW 35 trillion. The reason for rebalancing is the principle of maintaining regional and sectoral investment allocations. This is, of course, for the sake of returns and risk diversification.

Before the rebalancing deferral in January this year, the NPS’s asset allocation targets were 14.4% for domestic stocks and 38.9% for overseas stocks. This meant that domestic stocks accounted for 27% of the total (domestic + overseas) stock allocation. The Korean stock market is said to account for about 2% of the world's total stock market. Considering this, even at that time, the domestic stock allocation was already high and should have continued to decline. However, in May this year, the NPS increased the domestic stock allocation to 20.8%, while overseas stocks were reduced to 34.7%. As a result, domestic stocks comprised 37.4% of the total stock allocation.

While the NPS deferred rebalancing—from January to the end of June this year—the KOSPI index soared from around 4,300 to around 8,400. Had the NPS not deferred rebalancing, the KOSPI would not have risen so high. Foreign investors, through rebalancing, made net sales of KRW 149 trillion worth of stocks. If stock prices had not risen so much, the profits and Korean stock allocation for foreign investors would have been smaller, and the scale of net sales for rebalancing would also have been less. There would also have been less upward pressure on the won-dollar exchange rate.

Coincidentally, in July, stock prices began to decline. One cannot help but think that the NPS gave foreign investors the opportunity to sell and exit domestic stocks at high prices by making the misstep of "deferring rebalancing." If the NPS had rebalanced according to principle, it would have helped to somewhat stabilize the overheated market. The role of institutional investors as a "market safety net" is important not only when the market panics and prices plunge, but also when excessive one-sided expectations cause overheating.

During the 2015 Samsung C&T merger, Moon Hyung-Pyo, the former Minister of Health and Welfare, and Hong Wan-Sun, the former Head of the NPS Fund Management Headquarters, were each sentenced to two years and six months in prison for exerting external pressure on the NPS to vote in favor of the merger. It has only been about ten years, but it seems that the lessons from that time have already been forgotten.

The current Chairman of the NPS is Seong-Ju Kim, a former lawmaker from the ruling party, the Democratic Party of Korea. This alone is enough to raise doubts about the NPS’s independence.

P.S. Some say that the Japanese Government Pension Investment Fund (GPIF) also has a high domestic stock allocation, but GPIF’s asset allocation changes are not temporary measures responding to market conditions. Rather, they are structural decisions based on long-term macroeconomic paradigm shifts and projections about when the fund will be depleted. It was not simply to avoid selling.

In 2014, in line with the "Abenomics" policy framework aimed at escaping deflation, GPIF completely restructured its portfolio—previously centered on ultra-safe assets (Japanese government bonds)—to focus on risk assets (stocks). It drastically reduced its domestic bond allocation and increased allocations to domestic stocks, overseas stocks, and overseas bonds. The changes were: domestic bonds from 60% to 35%; domestic stocks from 12% to 25%; overseas stocks from 12% to 25%; overseas bonds from 11% to 15%; and short-term assets from 5% to 0%.

In 2020, in response to the deepening negative interest rates in Japan, GPIF carried out a second major restructuring, significantly increasing its overseas asset allocation: domestic bonds from 35% to 25% (domestic stocks remained at 25%, overseas stocks at 25%, and overseas bonds increased from 15% to 25%).

When GPIF changes its asset allocation targets, it does so boldly based on macroeconomic assessments. However, once the new targets are set, it adheres to them strictly and mechanically. When the Japanese stock market recently surged, GPIF played the role of a buffer to cool the overheated market by selling a large volume of Japanese stocks to stay within its 25% upper limit.

This content was produced with the assistance of AI translation services.