Temasek to allocate 30%-40% of portfolio in dynamic investments with higher expected returns

STATE investor Temasek will allocate between 30 per cent and 40 per cent of its portfolio into dynamic investments that are forward-looking and focused on growth.

The allocation – part of its T2030 strategy – comes as Temasek seeks to deliver returns that exceed its risk-adjusted cost of capital of around 9 per cent currently. The move also comes amid expectations of a more volatile and uncertain world.

Assets invested under the “dynamic” component are targeted to achieve higher returns than the rest of its portfolio, which would be invested in “resilient” assets that have a long-term value orientation.

Speaking on the company’s T2030 strategy on Tuesday (Jul 11), Temasek chief executive Dilhan Pillay said the focus for portfolio construction this decade would be to withstand exogenous shocks and perform through both up and down market cycles.

“As we navigate an increasingly complex world, there are significant key challenges in the future,” he said. “The investment climate has become much more complex than what we have encountered since the global financial crisis.”

The challenges Temasek has identified include persistent inflation and higher interest rates, which lead to potentially lower real returns.

Pillay added that factors including rising geopolitical tensions, rethinking of globalisation, and the costs associated with energy security and energy transition also point to potentially lower global growth and lower real returns.

Apart from geopolitical matters, other key issues Temasek has identified include climate change and cyber risks.

Temasek developed its T2030 strategy in 2019 as its 10-year roadmap to guide strategic planning and capability building for the organisation. It is an evolution of the company’s previous Temasek 2020 strategy.

One of the pillars of Temasek’s T2030 strategy is to build a “resilient and forward looking portfolio”.

The resilient component, which accounts for around 60 to 70 per cent of the portfolio, comprises Temasek’s core portfolio companies as well as its asset management business.

Meanwhile, the 30 to 40 per cent of its portfolio that is under the dynamic component would comprise direct investments in various focus sectors, as well as early stage unlisted companies.

Pillay said during a media briefing that both components of the portfolio would have to meet or beat their cost of capital.

Rohit Sipahimalani, Temasek’s chief investment officer, told The Business Times in an interview that meeting the target returns for the portfolio may not be that difficult.

“When we look at our historical investments, we have seen many companies that for a 10-15 year period have given us returns in double digits on compounded basis.”

Around two-thirds of Temasek’s current portfolio are companies that fall under its more resilient component, including their Singapore portfolio companies which make up around 40 per cent of the portfolio.

“Not all of them today are what I would call long-term compounders, but we want to make sure that they are,” Sipahimalani said.

In recent years, Temasek has supported portfolio companies such as Singapore Airlines, CapitaLand and Sembcorp Industries in various initiatives to enhance value.

“I think there is still quite a bit that can be done, and we will continue working with our companies on that,” he said.

Temasek’s global direct investments arm – making up 46 per cent of portfolio value – has been receiving most of Temasek’s capital over the last decade. It consists primarily of growth equity in companies that Temasek believes have the potential to be both market leaders and globally competitive.

Over the past decade, Temasek has invested more heavily outside of Asia for its global direct investments, but Pillay said they are looking to deploy more capital in South-east Asia, as the region has become more attractive due to potential of the Internet economy, as well as companies diversifying out of China.

Unlisted assets comprised 53 per cent of Temasek’s portfolio as at March 31, 2023, up from 27 per cent a decade ago.

Over the last 20 years, the unlisted portfolio has generated returns of 14.4 per cent per annum on an internal rate of return (IRR) basis, more than the 8 per cent IRR from its listed portfolio.

Sipahimalani said that public markets valuations are expensive in the US, but they are “seeing some cracks in the private valuations”. This could mean opportunities when companies need to raise funds, or in private equity secondary sales.

Apart from its strategic portfolio allocation, Temasek’s T2030 strategy also focuses on sustainability, as well as organisation and talent development.

Sipahimalani said Temasek will maintain a cautious investment stance and expects to invest at a moderated pace this financial year, given the challenging macroeconomic environment. 

He added: “However, given our strong liquidity position, we are ready to step up our investments in a market correction.”