Korea Teachers Pension Buys More Stocks as Bond Yields Slide

By Saeromi Shin and Sangim Han

April 8 (Bloomberg) -- Korea Teachers Pension, the nation’s second-biggest state retirement fund, is increasing purchases of stocks this year on expectations they will outperform bonds.

Domestic equities held by the $4.8 billion fund may rise to 28 percent by 2012 from 16 percent this year and 13 percent in 2008, Chief Investment Officer Lee Yun Kyu said in an interview. Local bonds will drop to 52 percent in 2009 from 58 percent, according to an allocation plan last month.

Technology and auto shares will outperform as the economy improves, while banks and builders may recover “fast” after declines, Lee said. The fund changed its stance on bonds as returns fell after the Bank of Korea cut interest rates by 3.25 percentage points to a record-low 2 percent since Oct. 9, the biggest reduction in a decade.

“Stocks seem more attractive than bonds this year,” Lee said in Seoul yesterday. “Bond yields are declining fast, casting concerns over how we achieve the targeted return.”

South Korea’s benchmark Kospi index rose 7.3 percent in the first three months of 2009, its best first-quarter performance since 2005. Last year, the measure fell 41 percent.

Gyeonggi-based Samsung Electronics Co., Asia’s biggest maker of chips, flat screens and mobile phones, has gained 29 percent this year, while Seoul-based Hyundai Motor Co., South Korea’s largest carmaker, surged 59 percent. Woori Finance Holdings Co., the country’s biggest financial company, climbed 34 percent. The company is based in Seoul.

‘Rally May Fizzle’

Yields on three-year corporate bonds with AA- ratings fell to 5.97 percent on April 7 from 7.72 percent at the end of December, according to Korea Financial Investment Association.

South Korean stocks have risen “at an unexpected” pace, driven by the government’s efforts to increase cash available to banks amid the global credit crisis, Lee said. President Lee Myung Bak’s administration has set up a 20 trillion won ($15 billion) fund to replenish lenders’ capital, and is establishing a 40 trillion won fund to buy distressed corporate bonds.

“Last year’s panic has disappeared,” Lee said. Still, “the so-called liquidity rally may fizzle out soon unless the stock gains are backed by earnings,” he said. Financial companies worldwide have reported almost $1.3 trillion in writedowns.

Samsung C&T Corp., South Korea’s second-biggest construction company, had its stock rating cut to “hold” from “buy” yesterday at BNP Paribas SA. A day earlier, Doosan Infracore Co., the biggest construction-equipment maker, was lowered to “sell” from “hold” at Deutsche Bank AG because excavator sales in China may fail to offset the effects of the global recession.

Worst Performance

Stocks drove the fund to a 4.7 percent loss in 2008, its worst annual performance since inception. The fund, which was set up in 1974, posted returns of more than 5 percent between 2001 and 2007.

Under South Korean law, all private-school employees must contribute to the fund run by the Ministry of Education, Science and Technology. State school teachers contribute to the separate Government Employees Pension Service.

The fund may devote 6 percent of assets to overseas equities by 2012, up from 1.9 percent last year, Lee said.

Korea Teachers Pension is aiming for a 7.1 percent return this year, according to the fund’s plan. It will seek a 13 percent return from domestic equities and a 6.5 percent yield from local bonds, it said, without giving last year’s comparative data.

“I think we will be able to meet the target,” said Lee. “We have already posted returns of about 3.5 percent this year.”

The fund favors corporate bonds among debt holdings because they provide higher returns than treasuries and other state bonds, he said. Treasuries and state bonds now account for just 6 percent of its overall bond assets, Lee said.

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