The five-year plan was revised just four months after its initial announcement. On May 28, the National Pension Service's Fund Management Committee raised the target allocation for domestic stocks from 14.9% to 20.8%. This adjustment comes only four months after the target was previously modified in January. The change was made in response to the KOSPI index surpassing the 8,000 mark, which significantly exceeded the original target allocation, prompting a need to mitigate market shocks from rebalancing.
The market reacted with relief. As of the end of February, the National Pension Service's allocation to domestic stocks had reached 24.5%. If the previous target had remained unchanged, it would have necessitated a massive sell-off amounting to tens of trillions of won. Such mechanical selling by the country's largest institutional investor would have placed considerable strain on the stock market. The increase in the target allocation alleviated the rebalancing burden for the National Pension Service and reduced selling pressure on the market.
However, the focus shifts from numbers to principles. Last May, the National Pension Service finalized its medium-term asset allocation plan for 2026-2030, setting the target allocation for domestic stocks at 14.4%. This decision was based on a strategic asset allocation (SAA) framework, which establishes long-term target allocations for various asset classes over a five-year period. The SAA is designed to maintain consistency based on long-term expected returns and risk levels, rather than frequently adjusting based on short-term market conditions.
Yet, as the market moved faster than anticipated, the principles were revised. In January, the National Pension Service raised the target allocation to 14.9%, marking the first change to its asset allocation plan since 2009. Just four months later, the target was again increased to 20.8%. Additionally, the committee decided to temporarily expand the allowable range for domestic stocks within the SAA framework, considering the heightened volatility in the domestic stock market.
The purpose of the SAA is to remain unaffected by short-term market fluctuations. If adjustments are made simply because it has become challenging to meet the target allocation, it shifts the focus from aligning assets with the plan to aligning the plan with the assets. Similar concerns have been raised within the industry. Given the intent of the medium-term asset allocation plan, the two adjustments made this year are seen as unusual. The repeated modifications to a five-year strategic plan within just a few months have raised questions about its predictability.
Moreover, the implications extend beyond domestic stocks. With the significant increase in the target allocation for domestic stocks, the potential for expanding allocations to overseas stocks and alternative investments is inevitably reduced. The National Pension Service has been steadily increasing its overseas investments to mitigate risks associated with domestic asset concentration and to align with the national economy. If the approach of raising the domestic stock allocation in response to market changes continues, there are concerns that the principles of global diversification pursued over the past several years may also be undermined.
Of course, it is not easy for the National Pension Service, which manages 1,500 trillion won, to prioritize principles alone. Large-scale sell-offs could lead to market shocks, affecting the returns for contributors. This decision can also be viewed as a pragmatic choice that considers both market stability and fund profitability. However, the National Pension Service's asset allocation plan serves as a benchmark for market participants to gauge future supply and demand, as well as a critical signal for the domestic capital market. Therefore, it is crucial to maintain not only returns but also predictability and consistency.
Ultimately, the key issue raised by this decision is how persuasive a five-year strategic asset allocation plan can be when adjustments to targets and standards are repeatedly made based on market conditions. The value of principles is proven when it is difficult to uphold them. What the National Pension Service should pursue is not only stable returns but also the trust that long-term plans will not be swayed by short-term market trends.
* This article has been translated by AI.
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