As the National Pension Service raised its target ratio for domestic stock holdings, a sell-off shock feared by some to be triggered by the fund is not expected. On the 28th, the National Pension Service held a meeting of its top decision-making body, the Fund Management Committee, and decided to raise the share of domestic stocks in total investment assets from the current level.
However, this decision has made the National Pension Service's exposure to domestic stocks excessively high. Korean stocks, classified as an emerging market, are assessed in global markets as high-risk assets. For now, the domestic market has surged on a super-boom in semiconductors, but if an unexpected shock hits and the domestic market undergoes a sharp correction, the investment return of the National Pension Service, which has a high share of domestic stocks, would inevitably fall.
Back in 2021, when the domestic market soared during the "Donghak retail investor movement," the National Pension Service also increased its allocation to domestic stocks. But as the market fell afterward, the fund's investment return was hit.
At 4:30 p.m. on the 28th at Government Complex Seoul, the committee held its fifth meeting and decided to raise this year's target weight for domestic stocks from 14.9% to 20.8%, an increase of 5.9 percentage points (p). Adding the full allowable ranges for strategic asset allocation (SAA) and tactical asset allocation (TAA), ±2% and ±3% respectively, it enabled the share of domestic stocks to rise to as much as 25.8%.
The committee said it "considered potential structural changes in the domestic stock market due to Commercial Act revisions and the actual expansion of the domestic stock share," adding it aimed "to enhance the fund's long-term profitability and stability and to mitigate market impact from rebalancing."
The committee also decided to temporarily expand the SAA allowable range to respond flexibly to conditions in the domestic market. However, it did not disclose specific figures to minimize market impact.
Initially, at its January meeting, the National Pension Service set this year's target ratio for domestic stocks at 14.9%. By simple calculation, to meet that, it could hold only up to 240 trillion won, and up to 320 trillion won to stay within the final allowable limit of 19.9%. It would have had to sell between at least 75 trillion won and as much as 155 trillion won of domestic stocks.
As of the end of February this year, the National Pension Service's fund totaled 1,610 trillion won. Specifically, domestic stocks 395 trillion won (24.5%), domestic bonds 298 trillion won (18.5%), overseas stocks 573 trillion won (35.6%), overseas bonds 101 trillion won (6.3%), alternative investments 234 trillion won (14.6%), and short-term funds 6 trillion won (0.3%).
With the KOSPI index, which was around 6,300 points in February, breaking above the 8,000 level this month, the National Pension Service's share of domestic stocks is presumed to have increased further.
The market breathed a sigh of relief. Had the committee not increased the share of domestic stock holdings, the National Pension Service would have had to sell a large volume of shares to meet the existing ratio. As of the end of February, the volume of shares the fund would have needed to sell to meet the previous ratio (14.9%) amounted to 155 trillion won. In that case, the shock to the market was expected to be large.
However, while a sell-off bomb from the National Pension Service has been averted for now, the fund charged with safeguarding the public's retirement has opened itself to criticism that it is playing a risky role in propping up the market. The domestic market is soaring now, but if prices fall, the fund would have to bear the losses after missing the chance to realize gains.
Some also worry this could repeat the failures of the 2021 "Donghak retail investor movement," when household funds poured in and the market surged. In 2021, the KOSPI index broke above 3,000 points for the first time ever and rallied. It was the result of what was dubbed the "Donghak retail investor movement," in which individual investor funds flowed en masse into the market.
As share prices jumped, the valuation of domestic stocks held by the National Pension Service also rose sharply, far exceeding the 2021 domestic stock target ratio (16.8%). To meet that ratio, the fund sold domestic stocks, and criticism grew. Under public and political pressure, the fund increased its allocation to domestic stocks.
But the price of not realizing gains at the peak was substantial. When global tightening began in 2022 and the domestic stock market sagged, the National Pension Service's return on domestic stocks came to minus (-)22.76%. The overall fund return also fell 8.22%, dealing a major loss to the public's retirement assets.
Lee June-seo, president of the Korean Finance Association, said, "The National Pension Service's top priority is to grow the fund efficiently and delay the depletion point by even a single year," noting, "As in the past, increasing the domestic stock share or deferring sales under public pressure could again expose total pension assets to risk when a downturn comes."
In response, National Pension Service Chairman Kim Sung-joo said, "It is completely wrong to say the National Pension Service is being used to prop up domestic stocks or that it moves according to policy demands." Kim said, "The market is good and we are making money; we cannot abandon such a market and go to the bond market, where returns are lower," adding, "The National Pension Service is faithful to its role as a long-term investor."