SINGAPORE: Singapore sovereign wealth fund GIC posted a drop in returns for the last financial year, as it warned of a challenging global economic outlook amid the COVID-19 pandemic.
For the year ended Mar 31, GIC’s 20-year annualised real rate of return came in at 2.7 per cent, down from 3.4 per cent in the previous financial year, according to its annual report released on Tuesday (Jul 28).
A key metric for evaluating GIC’s investment performance, the 20-year annualised rate of return is a rolling return where years are dropped and added as the computation window moves.
The dip in the real rate of return was largely due to “tremendous returns” during the tech bubble in the late-1990s to 2000 that dropped out of the 20-year window, said GIC’s chief executive officer Lim Chow Kiat during a press briefing ahead of the report’s release.
While the COVID-19 crisis has heightened vulnerabilities in the investment environment, Mr Lim said GIC had taken a “defensive position” even before the pandemic hit due to high valuations on assets and global headwinds.
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GIC’s portfolio, which is broadly split into six categories of assets, saw nominal bonds and cash - considerably safer investments - take up a larger share of the asset mix, from 39 per cent in the year ended Mar 31, 2019, to 44 per cent in the last financial year.
Meanwhile, the proportion of developed and emerging market public equities - assets that generate higher returns but are also riskier - in the portfolio fell by four and three percentage points respectively.
Taking such a position cushioned GIC’s investments from the “worst of the volatility” in the financial markets in the first quarter of this year, Mr Lim said in the report.
Dr Jeffrey Jaensubhakij, GIC’s group chief investment officer, said that teams have been worried about high valuations “for some time” and had been looking for investments that provide a more stable income.
For instance in private equity, it focused on businesses that offered a stable subscription revenue. At the same time it sold off assets in markets that had become too expensive, putting the money instead into “dry powder” - an industry term for highly liquid and cash-like assets.
GIC, which manages Singapore’s reserves, is “hopeful” it is able to deploy “quite a bit of dry powder” it has on hand, said Mr Lim, adding that the move hinges on how the coronavirus situation and the economy unfolds.
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GIC has increasingly taken a cautious macro stance in recent years. It will continue to do so, noted the report, given its mandate to achieve good long-term returns above global inflation.
AREAS GIC IS TURNING TO
Apart from turning to growth sectors like healthcare and technology, GIC is looking at the consumer businesses given the rise of e-commerce, as well as in infrastructure - particularly in the energy sector - which it believes will bounce back after the pandemic.
GIC has also been acquiring stakes in data centres and properties given the rise of digitalisation and e-commerce, said Dr Jaensubhakij.
“If COVID-19 has proven anything, it’s that people can shop from home and want to shop from home,” he added.
In terms of GIC’s investment approach, Mr Lim said it will have to “go earlier in our investment value chain” and work more closely with the companies.
“In quite a few cases, (we) supply them capital at the very early stage, rather than wait for some sort of secondary market offering,” he noted.
GIC is still bullish about China, even though a poll by UBS Evidence Lab found that more companies are planning to move their production out of China in the near future.
“It actually takes a long time (to shift production out of China) because China’s got a fantastic manufacturing centre of excellence, you can get all your suppliers close by,” Dr Jaensubhakij said.
Exposure to Asia as a whole will likely increase, Mr Lim said, as they expect urbanisation and the middle class to expand, and more Asian companies to go international.
Mr Lim said the United States, with its “strong private sector”, remains another bright spot, along with Indonesia and Vietnam, which have a sizeable young workforce and domestic markets.
On the other hand, emerging markets are a cause for concern amid the pandemic.
“We worry about the capacity of some of these countries in being able to cope with the rise of infection and all the healthcare needs,” Mr Lim said.
One upside of COVID-19 has been that the prices of some assets have fallen to reasonable levels, said Dr Jaensubhakij, referring to public equities and corporate bonds specifically in areas like the consumer sector.
“Our teams were really looking at different companies … but (they were) too expensive. When the price dropped down, we were able to step in,” he said.
While GIC does not allocate its assets by country or regions, it monitors its exposure to ensure adequate risk diversification worldwide, it said in its report.
Currently, 34 per cent of its assets are in the US, 19 per cent in Asia (excluding Japan), 13 per cent in Japan and 19 per cent in the United Kingdom and the Eurozone.
Mr Lim explained that there are four aspects that have shaped today’s investment environment: Roadblocks for globalisation, increasing industry consolidation, both rising headwinds and opportunities in Asia, as well as policies that have resulted in high debts and low interest rates.
Major countries have reduced their commitment to globalisation and as they try to protect their domestic interest even more, Mr Lim wrote in the report.
This could result in governments tightening restrictions on foreign labour and capital, which would hurt productivity as well as countries heavily reliant on foreign investments and exports.
At the same time, with global interest rates at 140-year lows and both corporate and public debt levels going up, inflation could go up and currency moves could play a larger role in returns.
COVID-19, he wrote, has intensified some of these factors.
For example, it has sped up the push to re-shore supply chains while hastening domestic production of certain essential goods, dealing another blow to globalisation.
Industry consolidation could also occur at a faster pace as the virus “drastically” weakens the finances of many companies, particularly small- to medium-sized ones.
“Given the depth and duration of this crisis, many will not survive while others will require additional funding, seek alliances or be acquired,” Mr Lim wrote.
The impact of COVID-19 on the financial markets will depend on how well and quickly the virus can be contained, how consumers and different sectors react to the virus and the types of economic policies governments wield to manage the crisis, Mr Lim said during the briefing.
“We think that the timing and the shape of recovery is highly, highly uncertain, because you have to be confident about each of these three to be quite sure what happens subsequently,” he added.
GIC is one of three entities managing Singapore’s reserves, along with the Monetary Authority of Singapore and Temasek Holdings.
Unlike Temasek, GIC does not own the assets it manages and does not invest in Singapore.