To alleviate the pressure of the Korean won depreciation, South Korea's largest pension fund is reducing its overseas investment scale

South Korea's largest institutional investor has significantly reduced its overseas investment targets and increased support for domestic assets by adjusting its asset allocation strategy. This move is not only to cope with the pressure of exchange rate fluctuations but also reflects the direct impact of the recent strong performance of the South Korean stock market on investment portfolios.

According to Bloomberg, the National Pension Service (NPS) of South Korea has decided to lower its overseas stock investment exposure target from the previous 38.9% to 37.2% by 2026, while raising its domestic stock allocation target from 14.4% to 14.9%. According to Yoon Kyung-soo, president of the International Department of the Bank of Korea, this means that NPS's overseas stock holdings will be reduced by about $20 billion compared to the original plan this year, representing a "significant" decrease compared to the investment amount in 2025.

The core motivation behind this strategic adjustment is to respond to the weakness of the Korean won and the instability of the foreign exchange market. The Ministry of Health and Welfare of South Korea, which oversees NPS, explicitly stated in a statement that the difficulties in obtaining foreign currency and the current state of the local foreign exchange market are the main reasons for this change. Market analysts believe that as one of the largest pension management institutions in the world, NPS's reduction in overseas asset allocation will directly lower its demand in the market to sell won for dollars, thereby providing support for the recently pressured won exchange rate.

This adjustment also includes alleviating the technical pressure on the South Korean domestic stock market. The Kospi index has surged over 95% in the past 12 months due to a spike in demand for artificial intelligence and semiconductors, causing the value of domestic stocks held by NPS to rapidly inflate, facing the risk of being forced into "mechanical selling" to maintain asset allocation ratios. By raising the domestic stock allocation target and suspending some rebalancing operations, regulators aim to avoid unnecessary shocks to the stock market during periods of increased market volatility.

Shift in Asset Allocation Focus to Domestic

As of October 2025, the assets managed by NPS are approximately 1,427.7 trillion won (about $990 billion). According to the latest resolution from the Fund Management Committee meeting, the fund's asset allocation logic has undergone a significant shift this year. While lowering the overseas stock proportion by nearly 1.7 percentage points, it has raised the domestic stock allocation target to 14.9%, a level consistent with last year, but in practical terms means strategically retaining more domestic assets.

Nomura Holdings economist Park Jeong-woo analyzed: “In short, NPS will not sell domestic stocks, nor will it buy more overseas stocks.” He pointed out that considering the current overseas stock ratio has already been set at this year's target level, and there are no plans to increase allocations in 2026, the expected dollar demand from this fund will be very limited.

Dual Considerations of Exchange Rate and Market Stability

Statements from South Korean central bank officials further confirm the authorities' focus on the exchange rate market. Yoon Kyung-soo stated that the central bank and government are taking measures to comprehensively review NPS's asset allocation adjustments and foreign exchange hedging strategies. This move indicates that South Korean policymakers are trying to stabilize the foreign exchange market by coordinating the fund flows of large institutional investors. In addition to exchange rate factors, the rare prosperity of the domestic stock market has also forced NPS to adjust its strategy. Benefiting from the surge in semiconductor demand driven by advancements in artificial intelligence technology, South Korea's benchmark index Kospi has performed exceptionally well over the past year, even breaking through the 5,000-point mark. This "fierce rebound" has led to NPS's local stock risk exposure actually reaching 17.9% as of last October, far exceeding the target set at that time and approaching the upper limit allowed by strategic flexibility.

Pause Rebalancing to Avoid Impact

To address the passive over-allocation caused by the market surge, the management committee has decided to temporarily suspend the portfolio rebalancing mechanism triggered by breaching the "strategic asset allocation tolerance range."

The committee warned that in an environment of increased market volatility—especially when the domestic stock market performs beyond the target range—mechanically executing continuous reduction operations could have a significant negative impact on both the local stock market and the foreign exchange market. This means that NPS will tolerate a certain degree of asset allocation deviation in the short term in exchange for overall market stability, avoiding becoming a driver of increased market volatility due to its massive size.