Korea's National Pension Posts -0.99% Return in January-August

By Saeromi Shin

Sept. 26 (Bloomberg) -- South Korea's National Pension Service, the country's largest investor, posted negative returns for the first eight months of the year after global stock markets were roiled by credit turmoil.

The pension fund's return averaged a negative 0.99 percent between January and August, the Ministry for Health, Welfare and Family Affairs said in a statement today. It forecast annual returns to fall from the previous year, its first drop since 2005.

``Global financial markets are facing a big crisis because of the U.S. credit crunch,'' Park Hae Choon, the fund's president, told reporters in Seoul yesterday. ``Market stabilization may not come easily despite a string of measures taken by the U.S. government.''

South Korea's benchmark Kospi index fell 22 percent in the eight months as the worst U.S. housing recession since the Great Depression and a resulting global credit crisis slowed the world economy, threatening to affect the nation's overseas shipments. The measure is headed for its first yearly decline since 2002.

The state-linked fund incurred a combined $66 million in realized losses from its investments in Lehman Brothers Holdings Inc., Merrill Lynch & Co. and American International Group Inc., according to the press release. It had a realized loss of $38 million from its holdings in the two biggest U.S. mortgage financiers Fannie Mae and Freddie Mac.

Equities Rout

South Korean bonds, whose positive returns buffered the fund from equity losses, accounted for 72 percent of the fund's 228 trillion won in total assets as of the end of August, while local stocks took up 13 percent, according to the statement.

The value of the fund's local equities declined 20.7 percent, while the return from local bonds was a positive 3.4 percent.

The slump in global stock markets has weighed on overseas pension funds. The California Public Employees' Retirement System, the largest U.S. public pension fund, had a negative 0.8 percent return for the April-June period. Netherlands-based ABP posted a negative 5.1 percent return on investment in the first half.

National Pension is forecasting its 2008 annual returns to come in the range of negative 4.52 percent to positive 5.8 percent. It may be the fund's first year-on-year decline since 2005, after posting a return of 7.05 percent in 2007 and 5.91 percent in 2006.

In July, Park said the fund will buy as much as 9 trillion won ($7.8 billion) of the nation's stocks in the second half.

Risk Management

Going forward, the global liquidity squeeze, combined with bankruptcy risks from financial institutions and weak investors' sentiment, may delay the recovery of the world economy, the NPS said in its statement. Under such circumstances, the fund will strengthen its risk management and consider cutting its targeted weighting for overseas stocks this year, it said.

``We may spend less on overseas shares than initially planned, and instead put the money into local bonds or other alternative investments,'' said Hong Sung Gi, head of the fund's Investment Strategy Division.

So-called alternative investments include possible purchases of shares in Daewoo Shipbuilding & Marine Engineering Co. and state-owned Woori Finance Holdings Co. and investment in social infrastructure and real estate, Hong said.

The pension fund said on Aug. 19 it may spend as much as 1.5 trillion won to make a joint bid for Daewoo. The fund has been in talks with companies that have shown interest, including Posco.

To contact the reporter on this story: Saeromi Shin in Seoul at sshin15@bloomberg.net.