"Domestic Pension Funds Must Completely Overhaul Asset Allocation Strategies, Including TPA Adoption"

Symposium on Desirable Asset Allocation Strategies for Pension Funds

"Bonds No Longer Safe Assets... Changing Investment Environment"

"Need for Increased Domestic Allocation and Enhanced Risk Management for Alternative Assets"

There have been calls to revise asset allocation strategies for domestic pension funds, including the introduction of an integrated portfolio management system (TPA), in order to enhance their long-term returns.

On the afternoon of the 6th, attendees are taking a commemorative photo at the "Desirable Asset Allocation Strategy for Pension Funds Symposium" held at the Korea Financial Investment Association Center in Yeouido, Seoul. Photo by Seungwook Park

On the afternoon of the 6th, Hyoseop Lee, Head of the Financial Industry Division at the Korea Capital Market Institute, stated at the "Symposium on Desirable Asset Allocation Strategies for Pension Funds" held at the Korea Financial Investment Association in Yeouido, Seoul, "Domestic pension funds need to introduce a TPA system that considers asset-liability management (ALM)."

TPA is a method that prioritizes target returns by allowing flexible allocation among asset classes—such as equities and bonds, or risk assets and safe assets—within the reference portfolio. This approach yields higher returns compared to other asset allocation strategies. According to Mr. Lee, institutions that adopted TPA achieved an average annual return of 8.6% over 10 years, while pension funds without TPA recorded an average annual return of 7.2%.

The need for such improvements arises because pension funds are facing a challenging investment environment. Mr. Lee emphasized, "In a low-growth phase brought about by low birth rates and an aging population, not only are pension inflows decreasing and outflows increasing, but persistent high inflation is also amplifying concerns over portfolio losses." He further pointed out, "While domestic pension funds are rapidly expanding their alternative investments to increase returns, there are concerns about losses in private credit and infrastructure investment sectors, particularly due to fears of an artificial intelligence (AI) bubble."

It is also problematic that bonds, once considered safe assets, no longer play this role. John Campbell, Professor of Economics at Harvard University and keynote speaker at the event, explained, "In the 2010s, the bond beta—which shows how much bond yields change when the stock market moves by 1%—was -0.2, indicating a negative correlation. Recently, however, this value has shifted into positive territory, meaning that bonds, previously a hedge against equities, are now moving in tandem with stocks." He argued that this necessitates a revision of asset allocation strategies.

On the afternoon of the 6th, participants are engaged in discussion at the 'Symposium on Desirable Asset Allocation Strategies for Pension Funds' held at the Financial Investment Center in Yeouido, Seoul. Photo by Seungwook Park

Mr. Lee proposed a three-stage approach for TPA implementation, tailored to the characteristics of each fund. He explained, "First, in the reference stage (Stage 1), which is a simple passive portfolio, the fund's risk tolerance is set. Next, a strategic stage (Stage 2) is needed to present the medium-term management direction, aiming to improve risk-adjusted performance." He added, "Finally, we should move to the active stage (Stage 3), which involves integrated portfolio management with an active portfolio composed of various asset classes and the overall portfolio."

Specifically, if Stage 1 comprises 65% risk assets and 35% safe assets, Stage 2 subdivides the portfolio into 40% foreign equities, 10% domestic equities, 10% foreign bonds, 25% domestic bonds, and 15% alternative assets. In the final Stage 3, based on risk preferences, the portfolio may be adjusted to 35% foreign equities, 18% domestic equities, 7% foreign bonds, 23% domestic bonds, and 17% alternative assets.

In addition, Mr. Lee pointed out the need to increase investment weights in response to the re-evaluation of the KOSPI market, enhance risk management systems for alternative assets, and establish currency hedging strategies tailored to each fund.

Meanwhile, there were also calls to redefine safe assets in the context of equities and bonds moving in tandem. Nam Seokgu, Head of Integrated Asset 2 at Korea Investment Corporation, remarked, "Given the current environment of inflation and geopolitical risks, bonds are less able to function as safe assets. We need to consider whether they can continue to play this role in the future." He added, "At Korea Investment Corporation, we are redefining safe assets to include not only bonds but also gold, commodities, and hedge funds."

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