GIC's 20-year returns beat global inflation

Singapore

AMID a gloomier outlook for fund managers globally, GIC has racked up annualised real returns of 4.1 per cent over the past 20 years to end-March this year, up from 4 per cent as at end-March last year. This return - above global inflation - was underpinned by a strong recovery in global financial markets, said the Singapore sovereign wealth fund.

While GIC is still gunning for assets that can generate sustainable returns over time, the outlook on returns across all major asset classes is clouded by high asset prices and the prospect of rising interest rates, said GIC managing director and chief investment officer Lim Chow Kiat.

"Our longer-term outlook is one of caution because asset yields are low," he told reporters.

The strong surge in asset prices since the global financial crisis of 2008-2009 has not been accompanied by an improved outlook in economic growth and earnings, Mr Lim observed. As a result, yields on assets have declined.

"On top of that, there is the possibility of higher interests and that adds additional headwinds to asset returns in the next couple of years, not only for GIC, but also for all global managers," Mr Lim added.

In US dollar nominal terms, GIC achieved an annualised return of 7 per cent over a 10-year period, beating the 6.7 per cent return on its Reference Portfolio, a passive market index comprising 65 per cent global equities and 35 per cent global bonds.

In its annual report, GIC explained that its five-year nominal return of 12.4 per cent per annum was lower than the 13.9 per cent return on the Reference Portfolio because of GIC's relatively fewer holdings of developed market equities that recovered in recent years.

Its annual 6.5 per cent nominal return over 20 years was also a shade below the 7.2 per cent return on the Reference Portfolio because of its more conservative asset allocation until 10 years ago.

GIC, which manages over US$100 billion of the nation's reserves, said that the rolling 20-year real rate of return on the portfolio is still the primary metric for evaluating its investment performance. It is expecting its portfolio's real return over a 20-year horizon to hover around current levels.

Having invested more heavily in developed markets in the past, GIC is keeping tabs on emerging markets, where it has been investing for over 20 years.

As at March 31, emerging market equities make up 19 per cent of GIC's portfolio, up from 17 per cent a year ago, while developed markets' share of the total assets pie dropped to 29 per cent from 36 per cent over the same period.

"We continue to want to do more in emerging markets, but I don't see us doing it in a big way," Mr Lim said. "Many of these decisions depend on bottom-up opportunities."

One crucial factor is still pricing, he added, meaning that GIC will not plough its money into assets where prices are higher than the assessed value.

GIC expanded its global footprint with the opening of its 10th office in April in Sao Paolo, Brazil to aid in developing investment opportunities in Latin America.

Last month, GIC led a group of investors including private equity firm Olympus Capital Asia in a US$106 million capital injection in Chinese milk producer Huaxia Dairy Farm. It also invested in Flipkart, India's largest e-commerce company, in Flipkart's latest round of funding that raised a whopping US$1 billion.

All in, GIC has invested across 40 countries and across asset classes including equities, fixed income, real estate and private equity. So far, its private equity investments have outperformed global equities, Mr Lim said.

It now has over 100 external manager relationships and more than 100 investee companies. But private equity accounts for 9 per cent of GIC's asset portfolio, compared to global equities' 48 per cent share.

The challenge in the private equity space lies in picking top-quartile managers, and high prices in developed economies have become "a major headwind for future returns", Mr Lim said.

In this current financial year, Mr Lim said that GIC will be closely watching the performance of developed market assets as the economies recover at a modest pace, central banks' policies, and how reforms in emerging markets such as China and India pan out.

GIC also beefed up its board yesterday with the appointment of former Temasek Holdings' chairman, S Dhanabalan, as a GIC director. Mr Dhanabalan had previously served on the GIC Board from 1981 to 2005 and was also previously the chairman of Singapore Airlines and DBS Group.