GIC’s annualised 20-year real return slips to 3.4%; maintains cautious investment stance

GIC’s annualised 20-year real return slips to 3.4%; maintains cautious investment stance

SINGAPORE: Singapore sovereign wealth fund GIC posted a drop in its key metric of investment performance for the last financial year, as it warned of a challenging environment ahead due to stretched valuations and heightening trade frictions.

For the year ended Mar 31, the 20-year annualised rate of return - GIC’s most important benchmark - slipped to 3.4 per cent from 3.7 per cent a year ago, according to the latest annual report released on Friday (Jul 13). This marked the third consecutive year of decline since the return rate hit 4.9 per cent in FY2014/15.

Nevertheless, GIC said this figure is above the global inflation rate and means that the international purchasing power of its reserves almost doubled during the 20-year timeframe.

CEO Lim Chow Kiat said GIC’s 20-year annualised rate of return was fluctuating around 4 per cent before declining below that in recent years. This is due to years being dropped and added as its 20-year window rolls.

“The high returns at the beginning of the tech bubble period (in the late 1990s) have dropped out,” he told reporters at a briefing, while adding that this effect could continue for a few more years and dampen the 20-year return.

“We don’t know what year will come in (but) what we can do is to focus on our approach, which is to make sure our portfolio is robust, diversified and is able to hold through difficult environments.”

In US dollar nominal terms, GIC’s portfolio returns were 5.9 per cent per annum over the last 20 years, slightly above the 5.7 per cent annualised return from its reference portfolio. The latter, made up of 65 per cent global equities and 35 per cent global bonds, refers to the risk that GIC can take to generate good long-term investment returns.

Over the five- and 10-year periods, GIC saw annualised returns of 6.6 per cent and 4.6 per cent in US dollar nominal terms, respectively. These are lower than the reference portfolio’s 6.9 per cent return over a five-year period and 5.2 per cent over 10 years.

This is due to how GIC’s portfolio has a smaller allocation to developed market equities than its reference portfolio, after lowering its exposure in recent years due to increasingly stretched valuations, said the FY2017/18 report.


As at the end of March 2018, developed market equities accounted for 23 per cent of GIC’s portfolio, down from 27 per cent a year ago.

This corresponded with a two-percentage-point increase in the allocation to nominal bonds and cash to 37 per cent – the highest level since GIC began issuing annual reports in 2008.

It also increased its allocation to private equity from 9 per cent to 11 per cent.

Emerging market equities, inflation-linked bonds and real estate form the other asset classes in GIC’s portfolio.

Having a smaller portion of its portfolio in developed market equities is reflective of GIC’s “cautious stance” at a time when downside risks are building up and the risk-reward ratio is not as attractive, explained Mr Lim.

The preservation of liquidity also means that the sovereign wealth fund will have “significant dry powder” in times of market volatility, he added. 

Group chief investment officer Jeffrey Jaensubhakij noted that GIC “decided it is prudent to be more cautious” and “did some pruning of the portfolio” earlier this year even though global markets were little swayed by initial threats of trade tariffs then.

“We like to prepare ahead so that when it comes to pass, we will already be prepared and if markets overreact, there may be opportunities to buy things that were otherwise not,” he said, while citing the example of Chinese A-shares which saw a sharp sell-off last month. “It was too expensive to buy but maybe, we can look at it now.”

When asked how GIC views the escalating trade conflict between the United States and China, Mr Lim described it as a “big concern”.

“If it leads to more disruptions of supply chains and difficulties with inflation, this could cause a serious impact on financial markets. As a global investor, we wish not to see that happen.”

Still, GIC is “pretty well prepared” given its diversified portfolio and cautious investment stance over the years.

“Even if the frictions escalate further, I would expect our portfolio to hold up relatively well,” said the chief executive.

Other downside risks shaping the challenging environment also include the increased risk of monetary policy tightening, elevated market volatility, underlying market vulnerabilities and most crucially, stretched valuations across a broad range of markets.

“Stretched valuations is a big challenge because if you go in at a high price, the fundamentals need to be better than what the prices already reflect for you to make good money,” explained Mr Lim.

“Being the manager of the country’s reserves, adopting a prudent approach is very important. The most important thing is to make sure that our portfolio is diversified and at the same time, maintain strong price discipline,” he added.

Nevertheless, Mr Lim said GIC remains ready to capture “idiosyncratic opportunities” or “potential market dislocations”.

For instance, it has set its sights on the technology sector, which has disrupted global economies and reshaped investment outcomes. Innovation in emerging markets, notably China and India, are where opportunities lie, the annual report said. 

The real estate sector, where the Singapore sovereign wealth fund has been active in, also remains on the radar.

As yields in traditional commercial assets like offices fall, GIC has turned to alternative real estate assets, such as student housing and rental apartment, said Dr Jaensubhakij.

In January, it formed a joint venture with the Canada Pension Plan Investment Board (CPPIB) and The Scion Group to acquire a student housing portfolio in the US for approximately US$1.1 billion (S$1.47 billion). It also partnered NOVA, a Shanghai-based property operator and investment manager, in May to set up a 4.3 billion yuan (S$904 million) rental apartment platform in China

Noting that GIC has to be “alert and agile” in its portfolio mix given the challenging environment of low returns and high downside risks, Mr Lim said: “We are prepared for the uncertainty ahead and are committed to delivering steady long-term returns on the reserves placed under our management.”

Source: CNA/de