South Korea Pension Fund to Trim Stock Holdings

South Korea's national pension fund, the world's fifth-largest, will cut the stakes it holds in local firms to below 10 percent because of new, tighter disclosure rules, a move that may hurt small and mid-cap stocks in its portfolio.

The National Pension Service (NPS) has been steadily raising its stockholdings, placing a floor under the equity market, and its portfolio is often mimicked by other fund managers.

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"We have set a direction towards doing that for companies in which the fund has more than a 10 percent stake," said an official at the Welfare Ministry that oversees the pension fund.

The Korea Economic Daily reported the NPS would cut its shareholdings in Korean Reinsurance and 13 other listed companies to below 10 percent as part of the country's ambitious financial deregulation law enacted on Wednesday.

The law strengthens disclosure rules for investors holding more than 5 percent in companies, in an effort to protect investors from financial market volatility.

The Capital Markets Consolidation Act aims to overhaul South Korea's flagging capital markets and boost the fund management market.

State-run NPS, with about 230 trillion won ($165 billion) in assets, had invested in 475 local companies as of end-2008, and owned more than a 5 percent stake in 139 of those firms.

That represents about 4.5 percent of South Korean stock markets, according to the Korea Economic Daily.

The ministry official said the fund had already shed some local stocks ahead of the new law, but declined to elaborate further as he was not authorised to speak to the media.

The newspaper said other firms include Hansol Paper, transport company Sebang, pie and snack maker Orion Corp, trading and energy firm LG International and Lotte ice cream maker Samkang.

The official said regulatory changes could expose the NPS's investment strategy to the public as well as raise its operating costs by requiring more frequent regulatory disclosures.

Based on its current shareholdings, the newspaper estimated the NPS would have to make 40-50 disclosures every month to comply with the disclosure rule.

Strategic Changes
     
Fund managers say the NPS move will have little impact on large-cap stocks, in which the fund has not built a significant stake.

But the change in its investment strategy may discourage other fund managers, who tend to mimic the pension fund's stock portfolios, from increasing holdings in small and medium caps.

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"Some major fund management companies tend to hold more than 5-10 percent in certain stocks," said Kim Eun-soo, chief investment officer of PCA Asset Management, adding the change in the NPS position could see this reduced.

Lee Sun-yeob, market analyst at Goodmorning Shinhan Securities, said, however, the move could eventually benefit more listed companies.

"They are making strategic changes and are probably expanding their interests into other companies, increasing the number of companies they invest in," he said.

The NPS said last month it would cut the portion of stocks in its portfolio to 20.6 percent from a planned 29.7 percent, while expanding its bond holdings to 73.4 percent.

Copyright 2009 Reuters. Click for restrictions.