NIR framework does not affect Temasek’s strategy, dividend policy

We thank Mr Kong Pih Shu for his letter (“Is it wise to use Temasek’s expected earnings for govt revenue?”, Feb 25) and would like to assure him on a few points.

First, the Net Investment Returns (NIR) framework does not affect Temasek’s approach to investment. Our investment strategy remains unchanged and we will continue to seek sustainable long-term returns.

Second, while the NIR framework will enable the Government to spend on the basis of Temasek’s expected returns, it has no impact on Temasek’s dividend policy, which is based on actual returns. We have a dividend policy that balances a sustainable distribution of profit to our shareholder with the retention of profits for reinvestment to generate future returns. We also take into account our responsibility to protect Temasek’s past reserves.

Third, Temasek takes concentrated risks and invests almost wholly in shares of companies, in anticipation of higher long-term returns. This means greater year-to-year volatility in annual returns and profits compared with most other diversified portfolios.

Temasek recognises that the Government’s NIR framework smooths out the volatility and provides a stable and more predictable basis for government spending through economic cycles. This can be especially important during an economic downturn, when the need for government spending may be higher, while annual returns may be lower.

Finally, we have modelled and simulated our expected returns compounded over 20 years. Our T-GEM modelling approach has been published in our annual Temasek Review since 2011. Although such models are not meant to predict actual performance, we believe we have a robust methodology to form a realistic view of our expected returns.