[From the Field]'Mega Whale' National Pension Fund's Domestic Equity SAA and TAA

(Seoul=Yonhap Infomax) Ha Rin Song –

South Korea's benchmark KOSPI index has surged more than 80% this year, pushing the National Pension Service (NPS)'s domestic equity allocation well above its year-end target of 14.9%. As the portfolio approaches the upper limit of its Strategic Asset Allocation (SAA) band, concerns have emerged over potential large-scale selling by the NPS.

Under current guidelines, as long as asset allocations remain within the SAA's permitted range, they are considered compliant with targets. The NPS is believed to be at or above the 17.9% SAA ceiling for domestic equities, which includes a 3 percentage point buffer.

If the allocation exceeds the SAA range, the NPS Fund Management Headquarters has two options. Primarily, if the domestic equity share surpasses the 17.9% SAA threshold, the fund must mechanically rebalance—i.e., sell shares—to bring the allocation back within the permitted band. Such mechanical selling is conducted gradually over a sufficient period to minimize market disruption.

The NPS is often referred to as a 'mega whale' in the domestic stock market, wielding significant influence capable of moving the entire market. As a result, even mechanical selling must be executed with precision to avoid sending misleading signals to the market.

This is why the NPS is also considering the use of Tactical Asset Allocation (TAA). Depending on economic conditions and market outlook, the Fund Management Headquarters can tactically adjust the SAA as authorized by the Fund Management Committee—this is known as TAA. Each year, the committee grants the headquarters discretionary TAA authority when setting asset allocation plans. The TAA range for domestic equities is 2 percentage points.

If the KOSPI rally pushes the domestic equity allocation to the SAA ceiling of 17.9%, the NPS can use its TAA discretion to delay mechanical selling, allowing the allocation to rise up to 19.9%. In practice, TAA is less about additional buying and more about extending holdings in anticipation of continued market gains. The effectiveness of TAA utilization is reflected in the fund's performance.

An NPS Fund Management Headquarters official said, "We do not chase rising stocks. The increase in domestic equity allocation is due to mark-to-market valuation, and using TAA means we are not compelled to sell mechanically."

Whether the NPS will further increase its domestic equity holdings will be determined in May next year, when the mid- to long-term asset allocation plan is finalized. The NPS, which invests more than 6% of the KOSPI's market capitalization, has been reducing its domestic equity allocation by 0.5 percentage points annually to diversify into overseas and alternative assets.

If the upcoming asset allocation plan maintains or increases the domestic equity share, it could signal a strategic shift in response to pension reform or changes in the domestic and global economic environment.

Should discussions arise to expand the SAA or TAA bands before then, it would indicate an even stronger intent by the NPS to increase domestic equity exposure.

Previously, in 2021, the NPS expanded the SAA band for domestic equities from 2 to 3 percentage points, a move criticized as a response to external pressure over its perceived drag on stock prices due to selling.

A source familiar with the NPS said, "It is important to adhere to pre-established principles. The previous expansion of the SAA band was a significant misstep. Even if there is pressure, there is no need to repeat past mistakes."

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