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

"A tower built over 10 years has collapsed. Over the past decade, the National Pension Service (NPS) systematically reduced its domestic stock allocation by 0.5 to 0.8 percentage points annually, bringing it down from the 20% range to the 14% range. But now, they have suddenly thrown principle aside and raised it back up to 20.8%."

This is what Jae-hyun Bae, Executive Director (CIO) of Prism Investment Advisory, who was responsible for asset allocation work in the Investment Strategy Office of the National Pension Service for about 12 years since 2013, said in an interview with The Asia Business Daily on June 30.

Last year, the KOSPI index surged, prompting the NPS to raise its domestic equity target allocation from 14.4% to 14.9% in January this year, and to postpone rebalancing until the end of June 2026. In May 2026, the domestic equity target allocation was drastically increased to 20.8%. Due to the sharp rise in stock prices, the actual domestic equity allocation exceeded the target, but the NPS refrained from selling stocks out of concern for negative market impact. There are also claims that the decision to postpone rebalancing until the end of June was related to the June 3 local elections.

While the NPS postponed rebalancing for political and other considerations, another major player in the KOSPI, foreign investors, continued to execute their own rebalancing. In the first half of 2026, foreign investors recorded a net sale of KRW 149 trillion in KOSPI stocks, while individuals made net purchases of KRW 99 trillion and institutions bought KRW 35 trillion. The reason for rebalancing is to adhere to principles regarding regional and sectoral investment allocations, which is, of course, to ensure returns and diversify risk.

Before the postponement of rebalancing in January this year, the NPS's target asset allocation was 14.4% in domestic equities and 38.9% in overseas equities. This meant the share of domestic stocks in total (domestic + overseas) equities was 27%. The Korean stock market accounts for about 2% of the global stock market. Considering this, even then, the domestic stock allocation was already high and needed to be further reduced. However, in May 2026, the NPS raised its domestic equity allocation to 20.8% and reduced overseas equities to 34.7%. The share of domestic stocks in total equities thus became 37.4%.

While the NPS postponed rebalancing — from January to the end of June 2026 — the KOSPI index soared from the 4,300 level to the 8,400 level. Had the NPS not postponed rebalancing, the KOSPI would likely not have risen so high. Foreign investors, through their own rebalancing, recorded net sales of KRW 149 trillion in stocks. If stock prices had not climbed so much, foreign investors’ profits and the share of Korean stocks would have been lower, and the scale of net sales for rebalancing would have been much smaller. The upward pressure on the won-dollar exchange rate would also have been less significant.

Starting in July, stock prices have begun to fall. It is hard not to think that the NPS's misstep of postponing rebalancing provided foreign investors with an opportunity to sell and exit Korean stocks at high prices. If the NPS had stuck to its principles and implemented rebalancing as planned, it could have helped stabilize an overheated market. The NPS often emphasizes its "market safety net" role, but this applies not only when panic causes sharp price drops, but also when excessive one-sided expectations lead to overheating.

During the 2015 merger of Samsung C&T, then-Minister of Health and Welfare Moon Hyung-pyo and then-NPS Fund Management Head Hong Wan-sun were sentenced to two years and six months in prison for exerting undue influence on the NPS's vote in favor. It has been about 10 years since then, and it seems the lessons learned have already been forgotten.

Currently, the Chairman of the NPS is Kim Sung-joo, a former ruling party lawmaker. This alone raises questions about the fund's independence.

P.S. Some say Japan’s Government Pension Investment Fund (GPIF) also has a high domestic stock allocation, but GPIF’s asset allocation changes are not ad hoc reactions to market conditions. Rather, they are structural decisions made in consideration of long-term macroeconomic paradigm shifts and the timing of fund depletion. It was not simply to avoid selling.

In 2014, in line with the "Abenomics" policy aimed at escaping deflation, GPIF radically restructured its portfolio from a focus on ultra-safe assets (Japanese government bonds) to riskier assets (stocks), drastically reducing the share of domestic bonds while increasing the share of domestic and foreign stocks and bonds. The allocation changed from Japanese domestic bonds 60% → 35%, Japanese domestic stocks 12% → 25%, overseas stocks 12% → 25%, overseas bonds 11% → 15%, and short-term assets 5% → 0%.

In 2020, in response to deepening negative interest rates in Japan, GPIF carried out a second major restructuring, significantly increasing overseas assets: Japanese domestic bonds 35% → 25%, Japanese domestic stocks remained at 25%, overseas stocks remained at 25%, and overseas bonds increased from 15% to 25%.

GPIF, when changing its asset allocation targets, makes bold adjustments based on macroeconomic judgments, but once targets are set, it maintains them in a mechanical and rigorous manner. During the recent surge in the Japanese stock market, GPIF played the role of a buffer by selling large amounts of Japanese stocks to maintain its 25% cap, helping to cool the overheated market.

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