SINGAPORE: Sovereign wealth fund GIC generated an annualised real rate of return of 4 per cent over the 20-year period that ended Mar 31 this year, down from 4.9 per cent a year ago, according to its annual report published on Thursday (Jul 28).
As the rate is calculated based on a rolling return, the investment firm attributed the decline partly to a bumper year in 1996 dropping out from the rolling 20-year return period.
Annualised Rolling 20-Year Real Rate of the GIC Portfolio since 2001. (Graph: GIC)
GIC explained that the 4 per cent rate of return also takes into account major events over the last 20 years, including the Dot Com Bubble and Bust in 2000 and the Global Financial Crisis in 2008.
The investment firm has well over US$100 billion in assets under management and its portfolio is distributed across six core asset classes – developed market equities, emerging market equities, nominal bonds and cash, inflation-linked bonds, real estate and private equity.
Over the past year, the investment firm said it has taken a more defensive approach, increasing its allocation to bonds and cash at the expense of some equity exposure.
Asset allocation to nominal bonds and cash rose to 34 per cent for the year ending Mar 31, edging down from 32 per cent the year before.
Over the same period, the asset mix in developed market equities fell to 26 per cent, compared to 29 per cent a year ago.
Asset Mix of the GIC Portfolio. (Table: GIC)
Looking ahead, GIC says real returns are expected to be lower in a protracted period of all-time low-interest rates, modest global growth prospects and high valuations of financial assets.
GIC Deputy Group President and Group Chief Investment Officer Lim Chow Kiat said the challenges include high debt and an exhaustion of policy options, especially in the area of monetary policy.
Valuations of financial assets are also high and returns based on starting valuations are low by historical standards, according to GIC.
The company estimated that a portfolio comprising 65 per cent US stocks and 35 per cent US bonds is expected to generate real returns of 1 to 2 per cent over the next 10 years, well below the historical average of 5.2 per cent.
Still, GIC said it saw opportunities for active investment in the current environment of low yield and high uncertainty by taking a bottom-up approach rather than allocating based on geographies and industries.
Mr Lim said there were two main situations that offered a "good starting point": Markets which have experienced a crash or bad sell-off - such as natural resources, commodities or even financials in some regions - and sectors that are fundamentally doing well such as healthcare.
ACTIVE MANAGEMENT STRATEGIES CAN GENERATE HIGHER RETURNS: ANALYSTS
Despite the difficult investment outlook, market watchers say GIC's active management strategies can help generate higher returns.
Investments in Asia make up almost a third of GIC's portfolio. Compared to most investors, GIC said it has a higher allocation to emerging markets, as they are seen to offer good returns, and opportunities for active management.
Said GIC's Mr Lim: "Emerging markets are places that we like, compared to most investors, we have a slightly higher allocation to that. We continue to see that as offering good returns. That's kind of top-down, asset class.
"Within emerging markets, we also see opportunities for active management, because they tend to be a little less efficient."
Professor of Finance Annie Koh, from the Singapore Management University said demographics in emerging markets point towards growth in the long run. "Another big trend in many emerging markets is the dividend from a young population," she said. "So you’re finding that 70 per cent of many of our emerging market economies have youth below 30 years of age. So that productive potential and consumption potential will essentially mean they would need funding, they would need investments to capture productive capacity and grow.
"So I think if we do have more skin in the game of the private equity component of the emerging markets, that would hopefully swing some of that low-yield perspective and give us that higher yield; of course, watching closely on the risk management component that we need to look at."
Prof Koh noted that different companies that would benefit from the growing middle class may not be listed entities. "So I think if part of the portfolio could be allocated more towards private equity, that would allow for us to participate when those companies, which are unlisted, eventually get listed or bought out, that would give us a chance in getting higher yield."
Some market watchers told Channel NewsAsia such investments provide potential for upside, in an environment where real returns are expected to be low. They said that with interest rates at historical lows, the search for yield has driven up asset prices making it difficult for investors to generate returns.
While all investors globally are faced with the challenges of a low-yield environment, Mr Cheng Chye Hsern, head of Investment at Providend, said GIC - having a long-term horizon - is not expected to take on excessive risk, even if real returns are lower.
"There's always a balance to be struck between risk and return, but from what I understand, I don't think they're going to be increasing their risk profile much to try to chase return," said Mr Cheng. "They look to evaluate opportunities on a case-by-case basis, especially for their active strategies. So I think if an opportunity with a good risk reward presents itself, they'll probably take a good look at it. But I don't think they'll be looking to chase returns just for the sake of it, to increase their active management strategy just for the sake of increasing returns, or increase risk just for the sake of increasing their returns."
Going forward, GIC said it will adjust some parts of its strategy as conditions change. Still, it said it will continue to emphasise a long-term, diversified, and relatively conservative portfolio in line with its risk mandate.