Management of the Pension Fund in Korea: Sharpe Ratio as a Measurement

Management of the Pension Fund in Korea: Sharpe Ratio as a Measurement

Purpose: This study criticizes the existing benchmarks of the national equity fund specified by the National Pension Service and proposes alternative benchmarks. Design/methodology/approach: First, this study investigates whether the existing benchmarks returns are affected by the value and momentum factors. Second, we examine the effects of different factors on the benchmark returns of internal and outsourcing investments. Third, we propose three benchmarks by including the value factor and/or momentum factor. Finally, the Sharpe ratios of return-to-risk are used to measure these proposed benchmarks compared to the existing benchmarks. Findings: First, the existing benchmarks of internal and outsourcing investments are associated with value and momentum factors, which have been observed in many other countries. Second, the Sharpe ratios of the three proposed benchmarks - value oriented, momentum oriented, and value & momentum oriented - are always better than the existing benchmarks. Third, the Sharpe ratio of the value oriented benchmark is better than that of the momentum oriented and value & momentum oriented benchmarks. Finally, the Sharpe ratios are better with increased investment weights of value and/or momentum. Research limitations/implications: This study uses the Sharpe ratio to measure the return-to-risk relationship. There could be other measures to capture the relationship. Originality/value: This is the first research to analyze the national pension equity fund with proposed benchmarks in the Korean market.