One of South Korea’s biggest fund managers is buying more U.S. investment-grade corporate debt to secure long-term assets for retirees in a country that’s set to have the world’s oldest population.
Mirae Asset Global Investments Co. has purchased in the primary market such bonds maturing in 30 years or more, according to Ee Hyeok Ze, its Seoul-based head of global investment strategy. U.S. investment-grade debt has outperformed Korean local corporate bonds this year, returning 5.2 percent versus 1.4 percent, Bloomberg Barclays and KIS Pricing Inc. data show.
“With retirement funds increasing at home, we started to turn to the U.S. corporate bond market last year as there’s solid demand for long-term bonds which offer more yield than local debt,” said Ee, whose firm manages about 100 trillion won ($89 billion). “There’s an ample supply of long-term bonds in the U.S. investment-grade bond market with relatively low risk, like we saw with the recent sales by Amazon and AT&T.”
South Korean pension funds are under pressure to earn better yields for the longer term as the number of people they cover increases: people who are 65 or older will make up almost 43 percent of the population by 2060, the highest among Organization for Economic Cooperation and Development countries, according to Statistics Korea estimates. Amazon.com Inc. sold $16 billion of bonds this month including callable debt maturing in 2057 while AT&T Inc. raised $22.5 billion in July in an offering that included callable securities due in 2058.
Demand for long-term bonds is likely to rise further especially from insurance companies and pension funds, who want to match the duration of their assets and liabilities as retirees increase, Ee said. And it’s rare to see bonds maturing in 30 years or more at home, he said.
U.S. investment-grade corporate bonds are attractive because the market has plenty of liquidity and there’s low risk of default, Ee said. He has slightly increased allocations in BBB rated U.S. notes for their yields.
Mirae is boosting U.S. bond purchases as South Korea’s population grows older. Retirement pension funds in Korea increased 16 percent last year to 147 trillion won, according to Financial Supervisory Service data. Those funds, of which more than 40 percent of the total are parked in savings accounts, returned 1.58 percent last year, even less than the 12-month average yield on banks’ time deposits at 1.63 percent, according to FSS data.
“Low returns on retirement pension funds mean less money that the elderly could use in the future,” Ee said. “This could decelerate economic vitality in Korea, where the aging population challenges economic growth.”
About 5.2 trillion won has flown into overseas fixed-income funds in Korea this year. Such funds have had net inflows every year since 2009, but they still only account for 13 percent of all fixed-income funds in the nation, according to Korea Financial Investment Association data.
Ee said that while the increase in Korean interest rates to levels higher than U.S. rates in recent weeks has made U.S. corporate debt less attractive in the short-term, in the long run American companies’ debt will continue to attract investors. The U.S.’s 10-year sovereign yield was 13 basis points lower than that of similar-maturity Korean government debt on Tuesday, after trading mostly higher in the year through July.
“U.S. corporate bonds should be included in investment portfolios in the long-term, considering the importance of long-term bond investment in managing retirement funds,” Ee said. “Fewer regulations coupled with active profit-seeking by U.S. companies could lead to higher economic growth and rising inflation, and that could make U.S. investment-grade corporate debt appealing.”