US pension fund bets big on Korea market
October 11 2017 11:46 PM

Bloomberg New York

Not-so-veiled threats of nuclear conflict and a war of words between “Little Rocket Man’’ and “the mentally deranged dotard’’ haven’t discouraged Tennessee’s pension fund from investing big-time in South Korea.
The state’s $51bn retirement plan and a scholarship fund has $517mn riding on South Korea’s stock market, making it the biggest investor in iShares MSCI South Korea Capped ETF, according to data compiled by Bloomberg. It’s Tennessee’s second-largest holding after Apple.
It goes against the grain, but so far it’s paying off. The exchange-traded fund has risen 40% since the middle of 2013, when Tennessee first invested.
“We’re watching and monitoring,” Michael Brakebill, chief investment officer of the plan, said in an interview. “The long- term history with this situation is that it’s a lot of posturing and not much reality.”
The adage popular with Warren Buffett, to be greedy when others are fearful, doesn’t necessarily apply here, given the popularity of the South Korean ETF.
But there are signs the verbal sparring between Kim Jong-un, supreme leader of North Korea, and US President Donald Trump has started to agitate investors. Bets against the South Korean ETF have increased.
And though South Korean bond issuers have continued to be well-received offshore, the Korean Stock Exchange Index’s gains have stalled.
“If fear is rising dramatically about this issue, it would be odd that these things are performing as well as they are,” Brakebill said.
To rebalance its holdings, and not because it’s fretful over war, Brakebill said, Tennessee cut its stake for the first time in the ETF by about 15% this year.
The state now holds about 7.3mn shares. The second-biggest US pension plan with a stake in the ETF, the Employees Retirement System of Texas, owns 225,000 shares.
Tennessee, which pays monthly benefits to 137,000 retirees, isn’t likely to change its allocation now, Brakebill said. The liquidity afforded by ETFs helps mitigate risk, he said. Tennessee is also the largest holder of ETFs that bet on Taiwan, Brazil and Chile, and has invested in stock ETFs in India and Mexico.
It’s on the Korean peninsula, more than 6,000 miles (9,650 kilometres) from the plan’s office in Nashville, where Tennessee is flirting with the greatest geopolitical risk.
North Korea, a hermit nation, has tested weapons it said may be able to reach the mainland US, and Trump has responded with fiery rhetoric.
There are economic threats to South Korea, too. China has imposed sanctions on the country after it decided to deploy the US’s Thaad missile-defence shield.
That could hurt the South Korean economy, according to Rodger Baker, an analyst at Austin, Texas-based Stratfor.
“There’s a lot of economic and political risk around Korea even shy of a war scenario,” Baker said. “I might not divest, but I’d need to identify and monitor markers that would trigger a divestment scenario.”
The state, in the southeastern US, has a business connection with South Korea. LG Electronics said in February that it would build a factory near Clarksville, Tennessee, and Hankook Tire Co in 2013 selected the state as the location for its first factory in the US.
Last fiscal year, the pension investment portfolio for the state earned a 2.79% return.
US stocks and fixed income make up the bulk of its investments, according to its annual report.
Institutional investors have “begun to see ETFs as a relatively cheap and efficient way to implement active strategies as opposed to just thinking as ETFs as passive tools,” said Andrew McCollum, a managing director at Greenwich Associates. “ETFs are sort of an efficient way to take a position that you know that you’ll be able to exit when the time is right.”
For investors who sense fear in the market due to the tense back and forth between Trump and Kim, it could be time to remember Buffett’s exhortation to be greedy, said M Nicolas J Firzli, director-general of the World Pensions Council, an international group of pension executives.
“The recent, highly exaggerated fall of the Korea Composite Stock Price Index is just a knee-jerk reflection of short-term geopolitical tensions in the Yellow Sea,’’ Firzli said.
It’s “a good opportunity to double down on South Korea and Asian equity if you’re a smart, long-term player.”

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