South Korea Pension Fund's Returns Fall Over 8 Months

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 1 percent between January and August, the Ministry for Health, Welfare and Family Affairs said in a statement today. It forecast annual returns to fall, the first drop since 2005. The fund had 228 trillion won ($197 billion) of assets at the end of August.

``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.

Washington Mutual Inc. yesterday became the latest casualty in the financial crisis that has already claimed Bear Stearns Cos. and Lehman Brothers Holdings Inc. JPMorgan Chase & Co. agreed to pay $1.9 billion for deposits at WaMu, which was seized by regulators.

Equities Rout

South Korea's pension fund incurred a combined $66 million in losses from its investments in Lehman, Merrill Lynch & Co. and American International Group Inc., according to the press release. It had a loss of $38 million from its holdings in the two biggest U.S. mortgage financiers Fannie Mae and Freddie Mac.

South Korean bonds, whose positive returns buffered the fund from equity losses, accounted for 72 percent of the fund's 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, the statement showed. Netherlands-based ABP posted a negative 5.1 percent return on investment in the first half.

National Pension is forecasting annual returns this year to come in the range of a 4.52 percent decline to an increase of 5.8 percent. It may be the fund's first year-on-year decline since 2005, after gaining 7.05 percent in 2007 and 5.91 percent in 2006.

Risk Management

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.

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.

Possible investments include real estate and shares of Daewoo Shipbuilding & Marine Engineering Co. and state-owned Woori Finance Holdings Co., 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.