S Korea’s NPS posts record returns as infra portfolio grows significantly

The public pension fund has grown its infra portfolio by more than 46% in the past five years, amounting to $19.9bn by end of 2019, with more than half invested overseas.

South Korea’s National Pension Service, one of the largest public pension funds in the world with 736.7 trillion won ($620.5 billion; €524.7 billion) of assets under management, invested $19.9 billion in infrastructure last year.

According to its latest annual report, NPS has increased its infrastructure investment from $13.6 billion in 2015 with the asset class accounting for 28.1 percent of its $71 billion alternatives portfolio and 3.2 percent of its total AUM at the end of 2019. Those figures have gone up further, according to the NPS website, standing at $20.8 billion and representing 3.5 percent of total AUM at the end of Q1 2020.

The pension fund also reported the highest rate of return overall since its inception in 1988. In 2019, it added 73.4 trillion won to its total AUM and posted an 11.3 percent return.

“NPS’s total AUM is expected to be over 1,000 trillion won in 2024,” a spokeswoman for the pension fund told Infrastructure Investor. “We aim to raise alternatives investment ratio to 13.2 percent of total AUM this year and [to] 15 percent by the end of 2024,” she said, from 11.4 percent currently. NPS’s infrastructure investment will also increase, the spokeswoman added but did not provide further details.

Of the $19.9 billion invested last year, investment in overseas infrastructure assets amounted to $13.1 billion while domestic investment reached $6.8 billion.

Investment in overseas infrastructure performed better than its domestic portfolio, generating an average time-weighted rate of return of 11 percent between 2015 and 2019, nearly double the pension fund’s benchmark of 6.1 percent. Its domestic infrastructure portfolio achieved an average time-weighted return of 6 percent during the same time period.

NPS started investing in infrastructure overseas in 2008. Some of the assets in its portfolio included London’s Gatwick Airport, Australian toll road operator ConnectEast Group and the UK’s High Speed 1 railway.

Focus on ESG and overseas investment

The coronavirus pandemic did have a slowing effect on NPS’s investment activity, the pension fund’s chief investment officer Hyo-Joon Ahn acknowledged during a June conference, citing difficulties in carrying out on-site due diligence.

But, “’contactless’ technology enabled us to overcome this obstacle and showed us how the new trend of contactless technology will eventually change the conventional investment process,” he said referring to video calls, or as one LP described to Infrastructure Investor recently, “desktop due diligence”.

He also urged investors to focus more on environmental, social and governance, something NPS plans to do.

“Funds managed under ESG focused-strategies are believed to perform more resiliently with strong downside protections in the long-term investment horizon,” he said. “In this respect, institutional investors including NPS should incorporate ESG factors for the purpose of risk management and return boosting as long-term investors. Despite the current downward pressure across the economy and market, NPS will keep increasing the allocation to foreign assets and alternative sectors in its portfolio,” Ahn said.