GIC's past, present and future are defined by a balancing act

Singapore

THERE is a delicate balance demanded from GIC, the sovereign wealth fund birthed in 1981 to gird a young nation's survival.

Covid-19 has underscored that.

As it is, refreshed social and geopolitical divides, as well as a low-returns future are assuredly in play, with returns from a broad range of asset classes expected by GIC to be low for the next five to 10 years.

This low-returns future is one that already "augurs to be the most challenging for GIC", said GIC's 40th anniversary commemorative book launched this week. Then, a global pandemic swept in, cementing its place as Singapore's most testing crisis. It demanded a record drawdown from reserves of S$53.7 billion over two fiscal years - and just about a decade after the first-ever drawdown of reserves in response to the Global Financial Crisis (GFC).

The book details the lesser known details of the history behind GIC, including how the fund covertly bought gold with US-led embargo on gold purchases in place at the time. The book was also refreshed from the 2016 e-book version with a fresh epilogue that discusses both the GFC and the Covid-19 response.

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At a press conference unveiling the printed book, author Freddy Orchard outlined the "acute" dilemmas that GIC has to endure now and in the times ahead: the short-term pressures versus the long-term view, its function as a both a rainy-day fund and an endowment fund, and the promise that it has to hold to both the present and future generations.

Uncertainties still abound. If the crisis continues and deepens, there is an exigency to do more, said Orchard, the former director of economics at GIC between 1989 and 1999.

Weighing out the impact on both present and future generations is embedded in GIC's philosophy. GIC is more than a rainy-day fund. It is also expected to be an endowment fund. Its mission statement is to "preserve and enhance" the long-term international purchasing power of the reserves it manages.

The fund looks at long-term returns, defined as a rolling 20-year real rate of return, to allow itself to stomach volatility and short-term losses.

This long-term view is also reflected in the spending rule, implemented in 2009, that allows the current government to take into the Budget only up to 50 per cent of the long-term expected real returns on net assets invested by investment entities, after deducting government liabilities. These investment entities are GIC, Temasek, and the Monetary Authority of Singapore.

The principles behind this are to cap the amount of spending that would have otherwise been allowed to grow for the benefit of future generations, to use return projections that accounts for inflation to protect the real value of the reserves, and to only permit spending after the costs of servicing liabilities have been set aside.

The government's ability to tap the reserves - within limits - avoids burdening future generations of Singaporeans with large public debt, showed the GIC Report from 2019/2020. "Singapore's ability to tap its national reserves in times of crisis is a significant strategic advantage."

The balance teeters in the face of a global pandemic that is callous about the value of humanity.

"How do you share the returns of the reserves, without taking from the future? How do you balance the two? The present generation are voters so they make their presence felt with the government. The future generations are unborn, they don't have a voice. So there's always a temptation to give way to the present, because the future is the future. It's not known," said Orchard.

The spending rule, based on real returns, is an "objective" way to try and balance the interests of the two.

"But of course, that interest, that balancing - it confronts reality today. Then you have to see how much you can move to the present without hurting so much the future."

Covid-19 in particular has illustrated the role of reserves as a contingency fund, as well as how fast reserves can be drained during a global crisis.

Former GIC group president Lim Siong Guan said the discipline behind the spending rule comes down to this question: who is paying for that dollar taken out from the capital?

"It's not the government that is paying for it," said Lim at the press conference. "Who is paying for it is your children and grandchildren... it seems to many people quite simple - we just draw down from the reserves, but just try to remember who is paying for that drawdown."

The end is the beginning

The new 30-odd-page epilogue in the commemorative book titled Bold Vision: The Untold Story Of Singapore's Reserves And Its Sovereign Wealth Fund showed that GIC is embarking on "GIC 2035", a way to scope out the investment landscape in 2035 amid the low-returns future, and to craft an "appropriate long-term strategy" with some intermediate targets.

This timeframe of 15 years or so is meant to give "our people freedom to be more radical, more courageous as they will not be constrained by the here and now", the book said, citing words from an interview with Lim Chow Kiat, chief executive officer of GIC.

"While not prompted by the pandemic, Lim Chow Kiat knew that GIC needed to prepare itself for a global economy beset by fault lines that have been accentuated by this crisis and, importantly, navigate implications of a trend reversal in interest rates that will represent headwinds for financial assets," Orchard wrote.

Speaking at the press conference, Lim said that while GIC started at a particularly difficult period in terms of macroeconomic development, it was also the best time to start investing, because the prices of financial assets were low.

"As an example, I think when GIC first started US 10-year Treasury yield was 14-and-a-half per cent. Today, it is 1-and-a-half per cent," said Lim. "So, in the initial years I would say a lot of our returns would come from just broad market returns... with asset yields at rock bottom, we in fact now have to work harder, to be able to use more skills to generate return, rather than just depending on broad market risk premium."

Today, GIC has moved far beyond plain-vanilla bond investments to becoming a proactive investor. In 2020, GIC was ranked by Global SWF as the most active state-owned investor for the second straight year.

After the GFC, in 2013, it became guided by a New Investment Framework that allowed the fund to take a portfolio view on asset allocations that would generate "beta" amid sufficient diversification, as well as a portfolio meant to generate "alpha". These are done while benchmarked against a reference portfolio that outlines the risk limits.

With 40 years under its belt, GIC would also need to overcome challenges to work at scale, work on a larger scope, and work at a sufficient level of depth, Lim said.

Strategies include a clear focus on new alpha opportunities and in seeking out deeper expertise. Another is in improving GIC's capabilities to invest in "mega-trends", such as sustainability transitioning. The organisation will look at culture and talent too, to "nurture a more dynamic, entrepreneurial approach", Orchard wrote.

At the press conference, former GIC group president Lim said the "continuous affirmation" from the government on the long-term approach makes a "tremendous" difference in the perspective about investing, risk taking and the future direction. It makes a big difference in what we consider talent... we need people who are professionals, who like the business of investing, rather than who are here because (they) want to make quick money in the process".

People matter

He offered a related perspective on how capital is spent on developing people here, in a small country lacking in natural resources and that emphasises skills developments, digitalisation, and more recently, startups.

"The question is whether you do that as a cost or spend, or you look at it as an investment. In many ways you have to look at this as an investment in the future, for which you hope to make good returns. Nobody can guarantee that but at least you're very clear in your mind that you are investing for the future, rather than simply paying the bills for today."

Every generation will face its own balancing act. A global pandemic has thrown out new uncertainties that will be felt in the passage of time. Lim's wish is for the next generation to be emboldened to solve problems. They should also not be held back by blame culture, he said.

"For the people who have more years of experience, their job is about offering wisdom and judgement. Rather than saying, 'this idea is a bad one', it's how you help people think (things) through, because you're helping yourself also in getting clarity on the reserves."

Bold Vision is available for purchase.

GIC's royalty fees will be donated to the Singapore Book Council to help its education outreach to schools.