The Bank of Korea is significantly overhauling its foreign asset management portfolio for domestic asset management firms, shifting from a focus on quantitative support to enhancing the operational capabilities and qualitative growth of these firms.
In a plan announced on September 16, the Bank of Korea stated that due to a surge in private sector investments in overseas stocks, the need for policy support for passive overseas stock management has diminished. Consequently, the bank will reduce its allocation to overseas stock management while increasing its investment in overseas bonds. Notably, the existing U.S. aggregate bond strategy will be transitioned to a global aggregate bond strategy, which will broaden the investment targets and regions.
Cho Seok-bang, head of the Foreign Asset Management Division at the Bank of Korea, remarked, "Domestic asset management firms have been overly focused on stocks, with no overseas stocks and only U.S. bonds domestically. We recognized this issue in the past and have been discussing adjustments internally since last year."
Since beginning to entrust foreign assets to domestic asset management firms in 2012 with investments in Chinese stocks, the Bank of Korea has steadily expanded its entrusted sectors to include developed country stocks in 2019 and U.S. aggregate bonds in 2022. The entrusted amount has grown from $100 million in 2012 to $3.21 billion in 2025.
The Bank of Korea assessed that, thanks to long-term funding support and the activation of private sector overseas stock investments, domestic firms have established overseas investment infrastructure and developed independent market resilience, achieving a significant level of the initial goal of creating a quantitative base. However, it noted that existing overseas stock management funds have been largely passive, closely following benchmarks, which limits the development of advanced operational capabilities.
The core of the new global aggregate bond strategy involves managing bonds from approximately 28 countries and over 30,000 securities, requiring simultaneous management across multiple countries and various currency zones. This presents a higher level of operational complexity compared to the previous U.S. aggregate bond strategy, which focused on one country and around 10,000 securities. It demands advanced active management capabilities that go beyond simple interest rate forecasts, requiring comprehensive analysis of various factors such as central bank monetary policy, macroeconomic cycles, and exchange rate volatility.
The Bank of Korea expects that the global aggregate bond strategy will enhance the systematic research and risk management capabilities of domestic asset management firms. Additionally, it will facilitate direct comparisons with large overseas asset management firms operating under the same strategy, making it easier to identify and address the shortcomings of domestic firms.
As part of this overhaul, approximately $1 billion in overseas stock assets managed by domestic firms will be shifted to the global aggregate bond strategy. Kim Jeong-hoon, head of the entrusted management team at the Bank of Korea, stated, "Internally, we plan to work with about three firms to transfer around $1 billion from stocks to bonds. The final amount may vary during discussions with the firms involved."
Notably, the management fees paid by the Bank of Korea for the global aggregate bond strategy will be more than double those for the existing passive stock strategy. The bank explained that this move is not merely a reduction in support for domestic asset management firms but a measure to maximize policy effectiveness using limited foreign assets.
The Bank of Korea emphasized that this restructuring is not aimed at reducing the scale of entrusted foreign assets for domestic asset management firms. It maintains its existing goal of expanding the entrusted proportion to around 10% in the medium to long term. However, it did not specify a concrete timeline for achieving this, noting that conditions must be established to allocate the increase in foreign exchange reserves to entrusted assets.
Kim added, "Transitioning from quantitative to qualitative does not mean we will not expand the quantitative scale. We aim to concentrate support in areas that are more complex and where private sector demand is relatively lacking to maximize policy effectiveness."
The adjustment in the entrusted proportion for domestic asset management firms will occur within the overall asset allocation framework of the Bank of Korea's foreign assets, ensuring that the overall proportions of stocks and bonds remain unchanged.
* This article has been translated by AI.
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