Korea’s NPS sees outsourced assets outpace direct investments for first time

[Photo by Kim Ho-young]

South Korea’s National Pension Service (NPS), the country’s largest institutional investor, has seen its domestic equity holdings managed through outsourcing surpass those managed directly for the first time.

According to a disclosure by the NPS Investment Management on Monday, its investment in local stocks totaled 125.37 trillion won ($96 billion) at the end of December last year.

Of the amount, assets outsourced for management amounted to 63.34 trillion won, exceeding those managed directly at 62.03 trillion won for the first time.

NPS funds managed through outsourcing have steadily grown to 81.5 trillion won in 2021, up from 30.2 trillion won in 2011.

However, in 2022, the assets under outsourced management decreased by over 18 trillion won compared to 2021.

Both directly managed assets and outsourced assets saw a decline that year compared to the previous year when the main Kospi lost more than 25 percent.

Assets under outsourced management still exceeded assets managed directly, as the assets in domestic stocks managed directly by the NPS experienced a larger drop during the same period, declining from 84 trillion won to 62 trillion won.

Despite the increase in outsourced assets, however, their contribution to returns is considered minimal. Based on the average return over the past five years, outsourced management underperformed direct management, with yields from outsourced management mostly lower compared to those from direct management.

According to the Ministry of Health and Welfare and the National Pension Fund Operation Committee, the average return for domestic stock holdings under direct management was 12.86 percent between 2016 and 2020, outperforming that of outsourced management at 8.74 percent by over 4 percentage points.

Over the past five years, from 2017 to 2021, returns from outsourced management exceeded direct management only once in 2021.

Meanwhile, data provided by the NPS to Representative Choi Hye-young of the Democratic Party showed that domestic equity outsourcing fees increased by over 40 percent to 183.3 billion won in 2021 from 130.4 billion won in 2020.

Currently, the NPS outsources domestic equity management to 29 asset management companies, including KB Asset Management Co., which manages 6.97 trillion won, Korea Investment Management Co. with 5.9 trillion won, and Mirae Asset Global Investments Co. with 5.54 trillion won.

“To our knowledge, the outsourcing fees are not as high as those for overseas pension funds,” said an unnamed official at a management company managing NPS funds. “The NPS also goes through a meticulous process to select management companies for outsourcing, assessing the advantages of outsourcing compared to direct management.”

The fees that asset management companies receive for managing domestic stocks for the NPS are known to be around 0.3 percent.

Industry insiders speculate that the NPS may increase direct management if outsourced management returns continue to remain low.