Liquidity key as AI concentration makes diversification more challenging, says GIC CEO

[HONG KONG] As the growing concentration of artificial intelligence-related stocks makes diversification more challenging in today’s markets, GIC is focusing on companies’ underlying business, investment quality and portfolio liquidity to navigate risks over the long term.

Speaking at the Global Financial Leaders’ Investment Summit in Hong Kong on Tuesday (Nov 3), GIC CEO Lim Chow Kiat outlined three considerations for navigating increasingly concentrated markets.

First, investors should look under the hood of these companies to examine their underlying businesses to determine the extent of their exposure to AI.

Lim cited the example of the MSCI World Index, where US stocks account for about 70 per cent of its weightings, even though many of these companies generate revenue from around the world.

Second, investors should focus on the quality of the companies, rather than allocate capital through a top-down approach.

“If you have done your work well, determined there’s a good management team, moat and things like that, over a longer period of time, it can cut through quite well,” noted Lim.

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Third, where diversification away from AI concentration is difficult, maintaining a good level of liquidity is important to give investors room to respond to market developments.

Historically, patient investors have been rewarded for holding assets over the long term, benefiting from a time premium and the tendency of valuations to revert to their historical averages over time.

But the rapid pace of technological change means some shifts could be structural rather than cyclical, making it harder to determine where valuations might eventually settle, added Lim.

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This uncertainty should translate to more risk premium pricing, and can play a role in balancing supply and demand of capital, he added. This is especially pertinent to credit investors, who may be reluctant to take on excessive exposure to a small number of large issuers.

“I would say a lot of long-term investors would like to be paid a little bit more in terms of getting that risk premium. I think that is a way for the market to digest this,” said Lim.

Staying grounded

Even as GIC has become bigger, more globalised and specialised, its mandate has not changed since inception.

“Knowing that certain things don’t change I think is really important in a world that keeps changing every day,” said Lim.

GIC is committed to making sure Singapore’s reserves keep growing while ensuring that funds are available when the country needs them.

Maintaining a long-term investment approach also does not simply mean a series of short-term investing decisions, he explained. “Because the drivers are different, so ideas like that keep us quite grounded.”

Talent is also key for GIC in fulfilling its mandate, said Lim. The CEO identified two factors in attracting and retaining employees.

The first involves getting the fundamentals right, including remuneration and the working environment.

The second is a sense of purpose, which Lim considers an advantage for GIC as people are looking to contribute to something bigger than themselves.

“In our case, I would say it’s of course to secure Singapore’s financial future, but actually it’s beyond that,” he added.

Safeguarding Singapore’s reserves aside, GIC’s investments also help build businesses, create jobs and support companies’ growth, giving employees a broader sense of purpose, pointed out Lim.