How Korea’s pension giant became a bystander as Kospi volatility exposed the risks of its home-market bet

The National Pension Service (NPS), the world's third-largest pension fund, is facing a market dilemma after an unusual expansion of its domestic equity allocation during the Kospi’s steep rally has left the fund exposed to the index’s sharp reversal. 

Having expanded its Korean equity holdings during the Kospi’s historic rally in the first half of the year, the NPS was largely sidelined as a market backstop when sentiment abruptly reversed and the index plunged in late July. With its domestic stock exposure already elevated, the pension fund had limited room to step in with additional purchases, leaving retail investors to play a bigger role in supporting the market.

Last month, pension funds — led by the NPS — were net buyers of 995.48 billion won ($695 million) worth of Kospi stocks, according to the Korea Exchange. Retail investors net purchased 5.37 trillion won in the same period, absorbing much of the 9.89 trillion won in net selling by foreign investors. 

“The NPS failed to fulfill its role as a stabilizing force during July’s market rout, as it was unable to cushion market downturns because its capacity to buy into the plunge was limited,” said Kim Dae-jong, a professor of business administration at Sejong University. 

The NPS’s holdings of Korean equities more than doubled to 543.6 trillion won as of the end of May from 263.7 trillion won at the end of last year, accounting for 29.4 percent of its 1,848.7 trillion won in assets under management.

Caught by sharp market reversal

The NPS’s predicament traces back to earlier this year, when a dramatic Kospi rally that made Seoul one of the world's hottest stock markets prompted the pension fund to make a series of unusual moves.

During the rapid market ascent in January, the NPS postponed domestic equity rebalancing to July to avoid disrupting the rally. In May, the fund also raised the upper limit of its domestic equity allocation to 20.8 percent from 14.9 percent, while expanding the allowable deviation under its strategic asset-allocation framework, as the market extended gains.

Such a rapid increase is unusual among global pension funds, many of which keep domestic equity allocations below 20 percent. Some accused the government of pressuring the NPS to make such decisions, citing the fund’s oversight by the Ministry of Health and Welfare.

Regardless of the motivation, those moves, made during the Kospi's astonishing 110 percent surge in the first half, have fueled market volatility and have left the fund with little room to buy when the index tumbled in July, eventually falling below 5,600 — nearly 40 percent off its peak just a month earlier.

Global investment firms have pointed to the NPS’s limited role as a market stabilizer as one reason behind the Kospi’s sharp decline.

“Slowing institutional support as National Pension Service’s domestic asset allocation approached practical limits” was among the key contributors to the Kospi’s steep drop, Cindy Park, an analyst at Nomura Securities, wrote in a July 28 report.

Park said institutional flows have become “less supportive due to asset allocation rebalancing by pension funds” as the NPS has “reached limits in overall fund allocation” after raising its domestic equity allocation from 14.9 percent to 29.8 percent.

Other global financial firms have raised similar concerns.

“While the rebalancing waiver contributed to superior returns for the NPS and Kospi, we believe the key tradeoff was really the increased volatility,” Bum Ki Son, an economist at Barclays, wrote in a note in June.

“Pensions are typically considered a stabilizer in the financial market. However, we believe the NPS tweak of its operations became an amplifier instead,” he added, noting that despite superior returns, the NPS portfolio’s volatility was much higher without the rebalancing.

Against its own playbook?

The NPS defended its portfolio management decisions, saying they were necessary to avoid causing a market shock. Some economists share that view, given that the fund faced unprecedented market volatility without an established guide for such circumstances.

“The National Pension Service’s purpose is not to prop up the stock market or defend share prices,” NPS Chairman Kim Sung-joo said during a radio interview on July 30. “If we had started selling based on our asset allocation targets, we would have had to sell more than 400 billion won worth of stocks every day, which would have inevitably caused a huge shock to the market,” he added, explaining the decision to delay portfolio rebalancing in the first half of the year.

Some economists justify Kim’s stance.

“The market simply could not have absorbed the sheer volume of selling required to bring the NPS back to its target allocation,” said an economist who spoke on the condition of anonymity. “From a pure investment-return perspective, the NPS would have been worse off if it had sold heavily during the rally,” he added, noting that the Kospi remains 53 percent higher than at the start of the year despite the sharp selloff in July.

Despite such defenses, some argue that the NPS’s allocation to domestic equities runs counter to its own rationale, as the pension fund in 2019 said it would increase the share of overseas investments in its portfolio from 30 percent to around 50 percent by 2024 to address the heavy concentration in the domestic market.

But that strategy was broken this year, as holdings of Korean equities increased while the share of foreign equities in its portfolio fell to 35.2 percent in 2026 from 37.8 percent a year earlier — the first year-on-year decline since 2011.

The NPS’s heavy exposure to domestic assets stands in contrast to the approach taken by some of the world’s largest pension funds, which have sought to limit home-market concentration.

Norway’s Government Pension Fund Global, the world’s largest sovereign wealth fund, excludes Norwegian listed equities, investing only abroad. The rationale is that the fund was created to shield the economy from fluctuations in oil revenues and prepare for a future when the country’s oil resources may eventually run out. Canada Pension Plan Investments holds 12 percent of its portfolio in Canadian assets, including equities and other investments.

“With Korean stocks more than doubling in an unprecedented rally this year, it would have been challenging for the NPS to respond effectively,” said Prof. Kim of Sejong University. “But the NPS’s fundamental responsibility is to focus on generating sustainable returns. It would have better fulfilled that role by helping cool the market during periods of excessive exuberance and cushioning the decline when share prices plunged, as they did in July.”

BY JIN MIN-JI [jin.minji@joongang.co.kr]