[Institutional Funds and Mutual Aid In-Depth]⑤Neither Too Hot Nor Cold... GEPS's '36.5-Degree Strategy'

Total Assets Reached 33.8 Trillion Won Last Year, 9.4% Return
FX Hedge Ratio Lowered from 90% to 50%, Increased Currency Exposure Except for Yen
Expanding Private Credit and Reducing Real Estate to Enhance Liquidity
Guarding Against U.S. Co

Editor's NotePension funds and mutual aid associations have long been key players in the capital markets. Aside from their primary roles—pension funds providing retirement security for citizens, and mutual aid associations supporting asset growth and welfare for their members—they show marked differences in asset size, investment strategies, and organizational structure. We take a comprehensive look into these public institutional investors who also serve as major sources of capital for both domestic and international markets.

The Government Employees Pension Service has chosen a strategy that further segments investment regions and products while maintaining the existing 'barbell strategy' that combines stable cash flow assets with growth assets. Getty Images

The performance of institutional investors in the first half of this year was impressive. As of the end of May, the National Pension Service recorded a return of 26.18%, while the Teachers’ Pension delivered in the range of 23%. These high figures were driven by domestic equities.

The Korean Local Government Officials’ Mutual Aid Association (GEPS) was relatively excluded from this dopamine rush of soaring returns. Although the percentage of stocks (including overseas) in its portfolio rose from 8.55% last year to 12.27% this year, this starting point differed significantly from the Teachers’ Pension, where stocks account for nearly half of assets, or even the National Pension Service, which holds 29.4% in domestic stocks alone.

Then, within just two months, the KOSPI plummeted from 8,476.15 to 5,663.24, a sharp decline of 33.19%. Criticism—such as having missed a rebalancing opportunity—did not target GEPS. GEPS’s unique “36.5 degrees” approach, neither too hot nor too cold, was once again highlighted in this year’s market.

On the contrary, GEPS is especially cautious about concentrating on a specific asset class. If the returns from one asset class grow large enough to dominate overall performance, asset allocation becomes unbalanced and portfolio volatility increases. Thus, while maintaining its existing ‘barbell strategy’—combining stable cash-flow assets with growth assets—GEPS has chosen a strategy that further segments investment regions and products. Overseas investment, which used to be concentrated in the United States and Western Europe, is now being broadened to include the Asia-Pacific region, such as Japan and Australia.

Assets up by 15 trillion won in four years... Funding ratio also improved

GEPS was established in 1975 under the Local Government Officials’ Mutual Aid Act. It manages the contributions paid by members, who are local government employees and officials engaged in local administration, with the aim of stabilizing their livelihoods and enhancing welfare. At founding, it started out with 80,000 members and assets of 1.2 billion won, but as of the end of last year, total assets had grown to 33.826 trillion won, and membership stood at 381,507 at the end of June this year. This marks an increase of about 15 trillion won in just four years, compared to 18.9883 trillion won at the end of 2021.

By asset category, alternative investments account for the largest share at 23.7093 trillion won (70.1%), followed by stocks at 4.1515 trillion won (12.27%), short-term funds and others at 3.6547 trillion won (10.8%), and bonds at 2.3104 trillion won (6.8%). In terms of regional allocation, overseas assets stand at 21.919 trillion won, representing 64.8% of the total.

Last year’s return of 9.4% exceeded the long-term target of 5.4%, but it was about half that of the National Pension Service (18.82%) and the Teachers’ Pension (18.93%) for the same period, and even trailed the Korea Teachers’ Credit Union (10.6%).

However, GEPS’s priority is not to rank near the top. Its goal is to exceed the long-term target return of 5.4% and ensure it never posts a negative annual result. In 2022, when both stocks and bonds slumped, the National Pension Service recorded -8.22%, the Teachers’ Pension -7.75%, and the Government Employees Pension Service -6.00%; yet GEPS managed to stay in positive territory at 3.9%. In the following years, returns were 5.1% in 2023, 9.1% in 2024, and 9.4% last year—making it four consecutive years without a loss. Although there were no big wins, there were no losing years, either.

The financial statements reinforce this story. Last year, GEPS posted operating income of 1.8136 trillion won and net profit of 567.9 billion won, a 45.9% increase over the previous year (389.3 billion won). The funding ratio, which measures the asset level relative to the obligations (principal and interest) owed to members, also improved from 112.6% in 2024 to 115.7% last year, indicating that GEPS’s reserves have thickened even after paying promised interest to its members.

Currency Hedging Only Half... Searching for 'Alpha' in Japan and Australia

GEPS maintains a barbell structure allocating about 70% to income assets that pay interest and dividends, and 30% to capital gain assets that seek price appreciation. With overseas investments accounting for nearly two-thirds of the total, currency movements have an increasing impact on real returns. Since 2022, GEPS has reduced the overall currency hedging ratio from about 90% to a target of around 50%. All overseas equities are left unhedged, about 30% of private equity and real estate (equity-type) assets are hedged, and 70–80% of interest-paying assets such as bonds and loans are hedged. Currencies like the yen, which can offer a hedging premium, are hedged to a higher degree. Here as well, GEPS avoids all-or-nothing stances.

Heo Jang, Chief Investment Officer (CIO) of GEPS, stated, “We do not determine our investment regions or currency weights based on currency forecasts.” He continued, “Instead, we apply differentiated hedging ratios that reflect the characteristics and expected returns of each asset class. While it may be unreasonable to absorb currency hedging costs for long-term alternative investments, neither is it desirable for a mutual aid association’s performance to be overly swayed by currency fluctuations.”

GEPS is also expanding its investments abroad. Japan and Australia have been selected as key markets. Although the United States is leading AI innovation and boasts a vast capital market that is hard to replicate, GEPS believes it is necessary to open other doors to reduce concentration risk in particular regions and asset managers. Japan, expected to see an economic boost from government-led fiscal expansion following a prolonged period of deflation, and Australia, with its low correlation to U.S. and European business cycles, as well as institutional stability and population growth, are highlighted as promising markets. GEPS plans to increase Asia-Pacific exposure in areas such as private credit, real estate, infrastructure, and listed equities, and intends to seek out specialized small and mid-sized asset managers in specific sectors.

Expanding Private Credit, Reducing Real Estate... As Membership Ages

Among asset classes, GEPS has named private credit as its top expansion target. The scope is being extended beyond traditional direct lending to companies to include asset-backed finance, structured credit, and the credit secondary market. In contrast, real estate holdings are to be steadily reduced. Due to sluggish trading activity, asset recovery is being delayed, and since real estate can only be reduced if it is sold, the pace of rebalancing is also inevitably slowing.

The long-term challenge is ensuring liquidity. As the number of retired members surpasses new joiners, the cash demand for benefit payments increases. Already, of about 380,000 members, 44,043 are designated as special members who continue to use GEPS products even after retirement. Alternative investments can provide illiquidity premiums, but if the market stagnates, it becomes difficult to recover funds at the desired time. With 70% of assets in alternatives, any mismatch between the timing of cash needs and asset recovery can cause issues irrespective of portfolio performance.

To address this, GEPS plans to utilize more tradable alternative assets such as securitized bonds, listed REITs, and listed infrastructure, as well as expand separately managed accounts (SMAs) to better control investment timing.

Chief Investment Officer Heo Jang stated, “The mutual aid association is, by its very nature, required to pursue both relatively high returns and low volatility, two often conflicting goals. In response to the changing membership structure, we will continue to structurally enhance the liquidity and flexibility of the portfolio from an asset-liability management perspective.”

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