BOK to Completely Overhaul Foreign-Currency Asset Management, Introducing 'Global Aggregate Bond' Strategy

[Financial News] The BOK is comprehensively overhauling its foreign-currency asset management for the first time in seven years. The core of the plan is to reduce outsourced developed-market equity investments focused simply on quantitative exposure and expand outsourced bond management aimed at qualitative growth. The BOK plans to shift from its existing U.S.-centered strategy to a global aggregate bond strategy, broadening its investment scope to the entire global market. Its medium-term target is to outsource up to 10% of its total foreign-currency assets, which stood at $442.3 billion in foreign exchange reserves as of August.
On the 16th, the BOK announced that it would reduce simple index-tracking investments in overseas equities and formally introduce active management of global aggregate bonds to generate high excess returns. The decision reflects its assessment that the rapid expansion of the private sector’s equity passive-fund market has reduced the policy impact of the BOK’s outsourced foreign-currency asset management.
The BOK’s overhaul of outsourced foreign-currency asset management comes seven years after it introduced outsourced developed-market equity management in 2019. Although it has significantly expanded the scale of its outsourcing, a substantial portion of the mandates has relied on passive investments that track indexes.
The BOK first outsourced Chinese equity management to domestic asset managers in 2012. It expanded the scope to developed-market equities in 2019 and U.S. aggregate bonds in 2022. As a result, outsourced foreign-currency assets grew from $100 million in 2012 to $3.21 billion last year. The portfolio consisted of $1.92 billion in developed-market equity passive investments, $700 million in U.S. aggregate bonds, and $590 million in Chinese equities. There are currently five outsourced asset managers.
The overhaul can be summarized as a major expansion of outsourced overseas bond management and a shift to a global aggregate bond strategy. While the existing U.S. aggregate bond strategy limited both the investment region to the United States and the types of bonds, the new strategy will cover bonds across multiple countries and currency areas simultaneously. It is a highly sophisticated active-management strategy that requires comprehensive analysis of complex variables, including differences in monetary policy among major central banks, macroeconomic cycles, and exchange-rate volatility, rather than relying solely on interest-rate forecasts.
In particular, active management requires advanced macroeconomic analysis and sophisticated risk management because it must handle a vast universe of tens of thousands of investment securities. The global aggregate bond strategy covers 28 countries and 30,000 securities—three times as many as the U.S. aggregate bond strategy.
Under the overhaul, about $1 billion of the funds invested in developed-market equities and outsourced to three asset managers will move to the bond market. The amount is expected to be approximately $200 million to $300 million per manager. Because the new mandates involve highly sophisticated active management, outsourced management fees will more than double. However, since the change involves adjusting the allocation of mandates between domestic and overseas asset managers, the overall equity-bond allocation of the BOK’s foreign-currency assets will remain unchanged.
Through the changes, the BOK expects domestic asset managers to advance their capabilities and domestic securities firms to improve their overseas bond-brokerage expertise as well.
Jo Seok-bang, head of the Foreign Capital Planning Department at the BOK, said, "We will pursue qualitative growth in line with the global aggregate bond strategy without reducing the overall scale of foreign-currency asset management. We will establish a solid foundation for domestic asset managers to generate stable excess returns and compete on an equal footing with global asset managers overseas."

[email protected] Jeong Sang-gyun Reporter