Franklin Templeton wins Korea pension mandate

National pension scheme outsources funds to a foreign manager for the first time.
South Korea’s $50 billion National Pension System (NPS) has just mandated Franklin Templeton Investment Trust Management (ITM), along with 12 Korean-owned institutions, a two-year contract to invest pension money, according to Michael Reed, country head.

Franklin Templeton is the first foreign-owned entity to be entrusted with NPS funds.

NPS began outsourcing to third-party fund managers only last year, when it awarded W200 billion ($160 million) among the investment management arms of Samsung, Mirae, LG and Regent securities companies.

It has just expanded that program, spreading out W600 billion ($480 million) among 13 fund managers. Of that, W180bn went to three local index managers (Euri Asset Management, Hyundai ITM, Delta Investment Advisory) and W420 billion to active managers. These comprise six ITMs (Daeshin, Hanil, Hanwha, Samsung, SK and Franklin Templeton), one asset management company (Midas) and three investment advisors (Balance, Cosmo, Fides). Franklin Templeton's mandate is for W50 billion.

Fund managers hope NPS sends out RFPs again either late this year or early next year for an aggregate mandate of up to W1.2 trillion. Other researchers and government officials say future bids remain up in the air. NPS officials declined to be interviewed.

ITMs can manage but not distribute discretionary accounts, mutual funds and investment trusts. Asset managers can manage only discretionary accounts and mutual funds, while advisors can manage only discretionary funds.

No consultant was used for the search. The mandates are all domestic equities, with managers required to maintain a minimum exposure of 90%.

Up to 70 money managers bid for the NPS deal, of which 20 made the short list, but none were joint ventures with foreigners. The JV between Hana Bank and Allianz reportedly bid but failed to make the shortlist, probably because it is less than a year old and lacked a sufficient track record.

YB Jeon, director of institutional marketing at Templeton, says the firm’s identity had nothing to do with its selection. Rather, its local equities funds have been excellent performers, independently ranked as number one for the past 18 months. Although he would not detail fees, he says his firm requested relatively high fees and still won the bid.

Nor did it sell itself as a foreigner. “We are a Korean company with access to international best practices,” says Reed.

The mandates come with tight performance requirements. Managers can be fired if a stock loses 30% of its value in a certain time frame, or if the fund’s total net asset value drops 5% below the KOSPI benchmark. It is a strictly long-only mandate, with no option for using futures and options. This mandate is also the first time NPS has included performance-based rewards, with bonuses if certain absolute targets are met.