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National pension set the FX hedging target rate for 2012; overseas bond at 100% and overseas stock at 20%

The FX hedging target rate for 2012 has been finalized

 

 

Ministry of Health and Welfare convened the fifth National Pension Fund Operation Committee (Chair; Health and Welfare Minister Rim, Chae Min)  on 24^th Nov. (Thur.) and finalized that the FX hedging target rate for 2012.

 

National Pension conducts foreign-exchange hedging* on overseas investment to secure stable rates of return as a long-term investor.

* Foreign exchange hedge is a practice of fixing an exchange rate at the current rate against potential foreign exchange risk in trade such investment, import, and export, etc

 

- By conducting FX hedging on overseas assets at an appropriate rate, volatility in the entire asset portfolio resulting from an exchange rate fluctuation is minimized.

 

The Fund Operation Committee had set the strategic FX hedging rates at 100% for overseas bond and 0% for overseas stock earlier in Sep. 2009

 

 

<FX hedging target rates by year>

(Unit :%)

 

The FX hedging rate for overseas bond for 2012 will be maintained at 100% according to the strategic FX hedging rate and the rate for overseas stock is determined at 20% by maintaining the foreign exchange buying volume for 2012 similar to that of 2011, taking into account of the impact on the foreign exchange market, etc.

 

In this regard, the National Pension expects to purchase foreign currency worth $ 10.3 billion (around 12 trillion won) in 2012. (Approximately, $ 40 million a day will be bought on average)

 

According to “the target-exceeding return rate and the extent of investment allowed per asset group for 2012 (draft)” which was decided along with the target FX hedging rate on that day, the extent of overseas stock and alternative investment allowed for next year will be expanded.

 

The Fund Operation Committee decides the target investment proportion per each asset group *(domestic stock, overseas stock, domestic bond and alternative investment, etc) every year and grants the extent of investment allowed, providing room for exceeding or falling short of the target.

*The target proportion per asset group for 2012 was decided at the fourth Fund Operation Committee on 29 June.

 

< Target proportion for 2012 >

(Unit :%)

- With this, the Fund Operation office intends to provide room for flexible operation of the fund given economic conditions and for active operation for creation of excess return.

 

○ The extent of overseas investment allowed has been expanded to make it able to flexibly respond to market fluctuations considering the investment conditions per the foreign exchange market situation.

 

- This allows the proportion of overseas stock to become more flexibly adjustable even if it gets difficult to secure a supply of foreign exchange for overseas investment due to a drastic rise in exchange rate resulting from a global financial crisis or if there is concern for a decline in investment return rates even though investment is possible, the proportion of overseas stock can be more flexibly adjusted.

 

- The proportion of overseas investment in 2012 is anticipated to be within the range between 10.1% at maximum and 6.1% at minimum. (Target proportion: 8.1%)

 

When it comes to alternative investment, the extent of investment allowed has been expanded considering low liquidity of the concerned asset*.

* Alternative investments such as real estate, SOC and private equity fund are large in scale and making new alternative investments and disinvestments is difficult. Therefore, it is highly likely to violate the allowed extent. 

- The proportion of alternative investment for 2012 is expected to be within the range between 11.6% at maximum and 6.8% at minimum depending on economic conditions. (Target proportion: 9.2%)

 

< The extent of investment allowed per asset group for 2012 >

(Unit: %pt)

 

The rate of excess return beyond the target for 2012 has been decided at 0.41%.

 

The target-exceeding return rate refers to the target excess return rate that the National Pension should achieve against the market return rate (the benchmark rate of return).

- The excess return rate is determined upon consideration of the operation capacity level (target IR) required from the Fund Operation office and the target active risk per judgment of the operator. 

 

From 2011, the extent allowed for investments was separately set aside for changes of the investment proportions per market conditions, minimizing the extent that can be operated at the discretion of the Fund Operation office. As a result, the 2012 target excess rate has been lowered compared to the previous year (‘11: 0.45% → ’12: 0.41%).

 

The 2012 loan interest rate for private childcare facilities and paid elderly welfare centers will remain the same as this year at 2.78%.

 

The National Pension had run a loan program for private child care facilities from 1 Oct. 1994 to 31 Dec. 1998 and for paid elderly welfare centers from 1 Feb. 1995 to 31 Dec. 2000. (The program no longer exists now.)

- As of 30 Sep. 2011, 733 billion which accounts for 95.7% of the entire loan of 765.4 billion won has been paid back and 32.4 billion won remains to be repaid.

 

The loan interest rate is readjusted only when the interest rate averaging the one-year time deposit for three months prior to the determination of the interest rate fluctuates by more than ±0.5%pt compared to the current loan interest rate. If the flunctuation remains within the range, the existing interest rate is applied.

 

The interest rate averaging the one-year time deposit interest rates for three months from Aug. 2011 to Oct. was 2.89%, of which the range of fluctuation remains within the standard range. Therefore, it has been decided that the current interest rate will be maintained.

- 328 private childcare facilities and paid elderly welfare centers that are paying back the loans will be paying back the principle and interest at the interest of 2.78% next year (with the bank commission to be separately paid)

 

In the meantime, the fund operation status as of end of Oct. 2011 has also been reported.

 

As of end of Oct. 2011, the fund asset amounts to 344.8 trillion won at market value, 20 trillion and 761.8 billion won up from the previous year by 6.4%.

* Proportion per asset: financial area: 99.3%(domestic stock 18.3%, overseas stock 5.6%, domestic bond 64.6%, overseas bond 4.2%, alternative investment 7.2%), welfare area: 0.03%, etc: 0.7%

 

The net fund flowed in by the end of Oct. 2011 was 20 trillion and 641.6 billion won, out of which 12 trillion and 24.3 billion was invested in stock, 3 trillion and 339.3 billion won, in bond and 5 trillion and 278 billion won was put into alternative investment*.

* By asset group, domestic stock: 11 trillion and 274.9 billion won, alternative investment: 5 trillion 278 billion won, domestic bond: 2 trillion 866.3 billion won, overseas stock: 749.4 billion won, and overseas bond: 472.9 billion won, respectively.

 

The figures shown in the fund operation status reported this time are tentative as of end of Oct. and the 2011 result will be finalized through the settlement at the end of Feb. next year.