KOSPI Surges Past 8400 as National Pension Fund Raises Domestic Stock Target to 20.8%

The National Pension Fund has significantly raised its target allocation for domestic stocks from 14.9% to 20.8% in response to the recent explosive growth in the domestic stock market. On May 29, the KOSPI index reached a record high, alleviating fears of mass sell-offs by pension funds.

Despite the impact of the Middle East conflict earlier this year, the National Pension Fund achieved a solid 4.42% return in the first quarter, surpassing 1500 trillion won in reserves.
  The National Pension Fund Management Committee held its fifth meeting on May 28, chaired by Minister of Health and Welfare Jeong Eun-kyeong, to discuss the realistic target allocations for this year and the medium-term asset allocation plan for 2027 to 2031.

Initially, the target allocation for domestic stocks was set at 14.4%, but it was raised to 14.9% in January due to the KOSPI's upward trend.

However, as the domestic market, particularly semiconductor stocks, experienced an unprecedented rally, the actual allocation for domestic stocks had already surged to 24.5% (approximately 395 trillion won) by the end of February. This situation would have required the fund to sell up to 155 trillion won in domestic stocks to align with the previous target.
  On May 29, the KOSPI soared by 290.86 points (3.55%) to close at 8476.15, marking a new all-time high. This surge likely increased the National Pension Fund's holdings further. Consequently, the Fund Committee decided to raise the target allocation to 20.8% just four months after the previous adjustment, allowing for a maximum combined strategic and tactical asset allocation of up to 25.8%, thereby easing concerns about a massive sell-off.

The committee stated, "We considered the structural changes in the domestic stock market and the fund's long-term profitability and stability. By adjusting the target allocation, we aim to reduce the mechanical selling pressure and mitigate the impact on the domestic stock market." The new allocation will take effect at the end of next month, when the rebalancing grace period ends.

Additionally, to respond flexibly to increased market volatility, the committee temporarily expanded the allowable range for strategic asset allocation in domestic stocks and reduced the maximum daily rebalancing size.

Lee Jae-won, a researcher at Yuanta Securities, noted, "The National Pension Fund's target allocation for domestic stocks has been realistically set at 20.8% for this year and next, alleviating concerns about forced sell-offs. This is a significant change that could positively influence the direction of the domestic stock market, which has been a major source of fear for investors."
  The adjustment in asset allocation is backed by the National Pension Fund's impressive performance. According to preliminary figures released by the fund's management headquarters, the fund's reserves reached 1526.1 trillion won at the end of the first quarter, an increase of 68 trillion won from the end of last year. The return on investment during this period was 4.42% (based on a money-weighted return).

This performance stands in contrast to major overseas pension funds, such as Norway's GPFG (-1.9%) and the Netherlands' ABP (-0.5%), which recorded negative returns during the same period. The fund has demonstrated its global competitiveness, overcoming previous concerns about talent loss and weakened operational capabilities.

The first quarter returns by asset class were 21.67% for domestic stocks, -0.11% for overseas stocks, -2.03% for domestic bonds, 4.98% for overseas bonds, and 5.27% for alternative investments.

As indicated, domestic stocks were the primary driver of overall returns. Despite a decline in global stock markets due to deteriorating investor sentiment following the outbreak of the U.S.-Iran conflict in late February, domestic stocks surged by 19.89%, contributing to a double-digit (21.67%) return for the National Pension Fund.

In the bond market, rising interest rates due to inflation concerns led to a decline in the value of domestic bonds, while overseas bonds maintained positive returns due to favorable exchange rate effects.

Kim Sung-joo, the CEO of the National Pension Service, stated, "While the return on investment in the first quarter was slightly adjusted due to the impact of the Middle East conflict, we are quickly recovering and maintaining good performance. As a long-term investor responsible for the public's retirement, we will continue to focus on enhancing returns through a steadfast investment philosophy and thorough risk management, regardless of challenging circumstances."
  The National Pension Fund's remarkable performance is not solely due to short-term factors. After recording an 8.22% loss during the global asset downturn in 2022, the fund has steadily increased its allocations to overseas and alternative investments according to its long-term asset allocation strategy. This has resulted in a sharp rebound in returns, with 13.59% in 2023, 15% in 2024, and 18.82% last year.

In particular, while many overseas pension funds faced significant losses due to high interest rates and rising vacancy rates, the alternative investment sector (17.09% in 2024, 8.03% last year) has shown resilience. Investments in U.S. tech stocks related to artificial intelligence and the strong dollar have paid off, with the National Pension Fund's investments in key office buildings in Seoul, such as the Grand Seoul in Gwanghwamun and the Centerfield in Teheran-ro, benefiting from solid tenant demand and low vacancy rates.

Additionally, overseas real estate assets previously considered at risk, such as the CIBC Square Tower 2 in Toronto (100% leased before completion) and the Causeway Bay Tower 535 in Hong Kong (96% leased), have gradually normalized, restoring asset health. The National Assembly Budget Office has projected that if the National Pension Fund can maintain an average annual return of around 6.5%, it could delay the fund's depletion date from the previously estimated 2057 to 2090.
  While the fund has successfully balanced supply stability and high returns, concerns remain. Although the KOSPI's breakthrough past 8400 has temporarily alleviated immediate sell-off shocks, there are warnings against misusing the National Pension Fund's resources as a tool for propping up high-risk emerging market stocks.

The trauma from the 2021 "Donghak Ant Movement," when the KOSPI first surpassed 3000 points, is still fresh. At that time, the National Pension Fund was pressured by public opinion and political forces to increase its domestic stock allocation but missed the opportunity to realize profits at the peak, resulting in significant losses in the following year (2022) of -22.76% for domestic stocks and -8.22% for the overall fund. If unexpected shocks lead to a rapid market correction, the National Pension Fund could bear the brunt of the increased allocation.

In response to critical perspectives, CEO Kim Sung-joo firmly rejected the notion that the National Pension Fund is being used to support domestic stocks or is swayed by political demands. He stated, "It is not correct to say that we are using the National Pension Fund to prop up domestic stocks or to respond to policy demands. We are generating profits because the market is favorable, and we cannot abandon this opportunity to invest in a declining bond market. The National Pension Fund is fulfilling its role as a long-term investor."

Meanwhile, the Fund Committee has reaffirmed its commitment to expanding overseas and alternative investments to diversify risks. According to the confirmed medium-term asset allocation plan for 2027 to 2031, the target allocation by the end of 2031 will be approximately 55% for stocks, 30% for bonds, and 15% for alternative investments. To ensure ongoing monitoring of market conditions, the target allocation for domestic stocks will remain at the same level of 20.8% as this year.

Minister Jeong Eun-kyeong stated, "This medium-term asset allocation plan is a decision made to maximize the fund's long-term profitability and stability while considering the impact on the domestic financial market in light of recent rapid market changes. We will continue to closely monitor the market to ensure that our fund management balances principles and flexibility."



* This article has been translated by AI.

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