The National Pension Service, Korea’s state-run pension fund manager, will aim to fully protect its investments in overseas bonds by hedging against foreign exchange risks through efficient management, the NPS’ National Fund Management Committee said Friday.
The committee said that the NPS will seek to safeguard its bond investments abroad by targeting a hedge ratio of 100 percent next year. It has set the ratio at zero percent for its 2014 overseas equity investment portfolio.
The NPS will seek to protect 100 percent of its overseas investments in fixed-income securities to offset the full risk exposure of its stocks to market volatility.
For instance, if the value of its bond value increases as the won-dollar exchange falls or as the won appreciates against the U.S. dollar, the NPS will most likely maintain its overseas bond investments until the exchange rebounds to avert currency exchange losses.
It will be able to manage its bond portfolio this way as bonds are considered safe assets that are less prone to volatility than riskier stock investments.
The state-run pension manager will also seek to minimize losses on its stock investments abroad stemming from volatile foreign exchange rates. For instance, it can unload its stocks when the exchange rate climbs, or when the won depreciates.
The NPS noted that it was able to see gains from its investments in overseas stocks during the global financial crisis of 2008 when the won was losing value while global stocks were bearish.
The dollar was strong at the time as the U.S. currency was considered the safest asset along with gold.
The NFMC said that the Korean pension had assets of 421.7 trillion won ($398.5 billion) under its management as of the end of October, up from about 392 trillion won at the end of December last year.
Its domestic equity investments accounted for 19.7 percent of the total, while domestic bonds made up 57 percent in the first 10 months this year. The rest of its investments were in overseas bonds and equities, and alternative assets such as infrastructure.
The NPS invested more than 64 trillion won ($58 billion) in overseas assets in 2012, accounting for about 16 percent of the fund under its management, and 327.5 trillion won in domestic assets.
Overall, the NPS said it was able to achieve returns of almost 7 percent on its assets both at home and abroad last year.
