GLOBAL - Korea's National Pension Service (NPS) has ended its 18-month search for an international real estate benchmark by adopting a seven-market metric created by Investment Property Databank (IPD).
The bespoke benchmark is a weighted composite of the seven real estate markets to which NPS has exposure - Australia, Japan, US, UK, France, Germany and Spain - with currency hedges factored in. For its domestic real estate investments, the KRW360trn (€255bn) pension fund will benchmark against a combination of the IPD Korean index and the consumer prices index (CPI).
Its decision to adopt the IPD benchmark, apparently agreed by the NPS in May but not announced until last week, brings to an end a long and detailed selection process that initially involved not only real estate but also infrastructure and private equity. It is not known whether the search for benchmarks for the latter two asset classes will continue.
The search was sparked by a marked growth in the pension fund's $24bn (€19.5bn) alternatives portfolio built up since 2002, which delivered a return of 10.2% in 2011. By 2016, NPS expects alternatives to make up more than 10% of its overall portfolio which could reach KRW1,000trn by 2020.
NPS launched a formal study of the options for benchmarking all three asset classes at the beginning of 2011, carried out by consultancy Towers Watson. The study, which reviewed benchmarks already adopted by other pension and sovereign wealth funds, culminated at the end of the year in an alternative investment forum hosted by NPS in Seoul in November.
From that process emerged a consensus that the benchmark should be unambiguous, investable, measurable, appropriate, understood by the managers, set in advance of the measurement period and the responsibility of the managers.
IPD Korea manager Howard Shim said in a statement the NPS had seized opportunities presented by the global financial crisis "more effectively than most", describing NPS as "one of Asia's most far-sighted investors"
Only 6.8% of the Korean pension fund's total assets under management are currently invested overseas.