NPS Posts –8.22% Return for 2022...

Alternatives Perform Well amid Market Downturns

- Entering this year, equity and fixed income markets have remained stable and its performance has rebounded.

□ The National Pension Service Investment Management, a dedicated fund management arm of the National Pension Service (NPS; Chairman & Chief Executive Officer Kim Tae-hyun), announced on March 2, 2023 that the National Pension Fund had a preliminary value of KRW 890.5 trillion as of December 31, 2022 and returned negative 8.22% for the fiscal year ended December 31, 2022.

○ The negative return reflected tighter global financial conditions driven by major central banks’ monetary tightening and Russia’s invasion of Ukraine. However, some losses were offset by expanded allocations to alternative assets and foreign exchange gains from the strengthening of the U.S. dollar.

○ By asset class and on a money-weighted return basis, domestic equity returned -22.76% and overseas equity returned -12.34%. Domestic fixed income returned -5.56% and overseas fixed income returned -4.91%. Alternatives returned 8.94%.

□ The Fund’s traditional asset classes outperformed their respective benchmarks on a time-weighted return basis.

○ A benchmark is a reference standard against which investment performance can be measured, and the time-weighted return method is applied to compare returns to those of an benchmark.

○ In 2022, domestic equity outperformed its benchmark by 0.47%p; overseas equity by 0.15%p; domestic fixed income by 0.04%p; overseas fixed income by 0.88%p.

* Alternatives are excluded as their benchmarks have yet to be determined.

* Appendix 1 shows time-weighted returns by asset class.

(money-weighted return, KRW trillion, %)

□ Specifically, domestic and overseas equity portfolios experienced a sharp drop in value due to ongoing market volatility at home and abroad triggered by the prolonged war in Ukraine and the U.S. Federal Reserve (Fed)’s aggressive tightening stance to tame surging inflation.

* Domestic Stock Market (KOSPI): down 24.89% from the beginning of the year
Global Stock Market (MSCI ACWI ex-Korea, USD): down 17.91% from the beginning of the year

○ The value of domestic and overseas fixed income securities fell as interest rates rose sharply amid concerns about inflationary pressures and persistent monetary tightening stance.

* Korea Treasury (3-year): up 193.0bp, (10-year): up 141.7bp from the beginning of the year

* U.S. Base Rate: up 4.25%p, U.S. Treasury (10-year): up 236.5bp from the beginning of the year

○ Alternatives achieved higher returns than those of traditional assets on the back of capital appreciation and realized gains from real estate and infrastructure assets, as well as a rise in the USD/KRW exchange rate.

□ Since the Fund was established in 1988, the NPS has sought to actively diversify its portfolio, identify new assets and source the best investment opportunities as early as possible, in order to contribute to stabilizing the livelihood of the people and promoting their welfare by providing old-age, disability and survivors’ pension benefits under the National Pension Plan.

○ As of December 31, 2022, the cumulative annualized return since inception was 5.11%. Over the five-year period ended December 31, 2022, the Fund generated an investment income of KRW 151 trillion, even considering the losses last year.

□ 2022 was highly unusual in that equity and fixed income markets fell in tandem.

○ The Fed and other major central banks aggressively tightened monetary policies and raised interest rates to rein in inflation led by global supply chain disruption, the Russia-Ukraine war and commodity price hikes.

○ Historically, equity has been considered risky and fixed income has acted as a safe haven, moving in opposite directions and thereby offsetting each other. That was not the case in 2022 as both plunged simultaneously for the first time since the stagflation in the 1970s in the overseas markets and for the first time since 2001 in the domestic market.

* Appendix 2 shows return distributions in equity and fixed income markets in Korea and the U.S.

□ After the challenging year, global financial markets started 2023 on a stronger footing and the NPS’s investment portfolio, including equity and fixed income, has recovered from the losses that occurred in 2022.

○ Most of the preliminary financial results disclosed by the NPS are based on valuation, not realized losses; hence, when the investment landscape improves, such losses will be further restored.

○ In February 2023, the NPS’s investments in financial assets delivered a preliminary return of around 5%, and the total assets under management recovered to more than KRW 930 trillion.

* By asset class, both domestic and overseas equity returned around 9%; domestic fixed income around 1%; overseas fixed income around 4% (All figures are preliminary estimates; for fixed income’s return, holding period return is used rather than annualized return).

□ “Heightened external uncertainty made 2022 an extremely rare year where both equity and fixed income tumbled together,” said Kim Tae-hyun, Chairman & CEO of NPS.

○ “Looking ahead, I expect that financial markets will maintain recovery pace and the Fund will generate better returns in 2023.”

National Pension Fund as of December 31, 2022

Distributions of Returns in Equity·Fixed Income Markets in Korea and the U.S.