Temasek posts total shareholder return of -5.1% for FY23, worst performance in 7 years
Yong Jun Yuan
STATE investor Temasek posted a one-year total shareholder return (TSR) of negative 5.07 per cent for FY2023 ended March and a net portfolio value (NPV) of S$382 billion, down from S$403 billion a year ago, as global asset valuations fell in the last year.
This is the worst one-year TSR it has generated in seven years.
“Our global direct investments saw a reversal of gains from the high valuations in the last two years, particularly in the technology, healthcare, and payments space, as valuations de-rated in the higher interest rate environment,” Temasek said.
Among the factors that affected its performance – persistent inflation despite rate hikes by central banks; intensifying geopolitical tensions; and rising nationalism and protectionism, leading to a “marked shift” away from the globalisation that has supported global growth over the past 20 years.
Over the last 20 years, Temasek’s 20-year TSR has also fallen from 16 per cent in 2003 to 6 per cent in 2016 before rising to 9 per cent in 2023.
Still, Temasek chief investment officer Rohit Sipahimalani said that there was a low base effect to account for.
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“In the late 90s, which form the base of 20-year returns up to post-2016, you had Singtel that went public, and was trading at about 50 times earnings which, at the time, made up about 15 per cent of our portfolio,” he said.
Temasek chief financial officer Png Chin Yee said Temasek also benefitted from the high growth Singapore had at the time, which is probably not replicable in the current environment.
Temasek registered its first net loss due to a change in accounting standards, as it had to take into account unrealised mark-to-market losses posted by companies in which it had less than a 20 per cent stake.
Png said that if unrealised gains and losses of sub-20 per cent investments were not included, the company would have had a net profit of S$14.7 billion, down 29.7 per cent year-on-year.
Its one-year risk-adjusted cost of capital rose to 9 per cent, up from its three-year risk-adjusted cost of capital of 7 per cent.
Still, Sipahimalani said that the higher cost of capital should not be a problem in itself.
He noted that the rising cost of capital is a natural consequence of higher inflation and interest rates. On a nominal basis, the company should also see higher returns.
Net investments fell to S$4 billion this year, from S$24 billion a year earlier. Investments made fell by 49.2 per cent to S$31 billion, while divestments fell 27 per cent to S$27 billion.
Sipahimalani said valuations in the United States have become “very expensive”, with the S&P 500 index trading at 19 times earnings with real rates at about 1.7 per cent to 1.8 per cent.
In the decade before Covid-19, however, the benchmark index traded at 15 times earnings with real rates at about 0.4 per cent.
Europe has outperformed expectations despite falling into a technical recession, due to the fall in gas prices and China’s reopening. He said valuations are about 12 times earnings, which is slightly below historical averages.
China is on the other end of the economic cycle, he said: “It’s coming into cyclical recovery out of Covid, but the base of recovery is slower than expected.”
He added that the only engine of growth the country can rely on to meet its GDP target is consumption.
With the MSCI China trading at less than 10 times earnings and more than one standard deviation below historical averages, he believes there will continue to be opportunities to invest in China.
He added that Temasek will take a geopolitical lens to the investments it makes – to avoid companies in the crosshairs of US-China tensions, while favouring companies with large domestic markets.
It will also favour companies with strong pricing power and cash flows, amid an environment of higher inflation and interest rates.
Temasek’s portfolio remains anchored in Asia, at 63 per cent. By underlying exposure, Singapore, China and the Americas remained its three largest markets. These made up, respectively, 28 per cent, 22 per cent and 21 per cent of investments.
The two largest sectors were transportation and industrials, and financial services.
The transportation and industrials sector grew in weightage to 23 per cent, from 22 per cent a year earlier. The group cited investments in United Kingdom-based testing group Element Materials Technology and Singapore ground handler Sats as reasons for the rise in weightage.
Temasek had participated in Sats’ S$798.8 million rights issue to partially fund the latter’s strategic acquisition of Paris-based Worldwide Flight Services, an air cargo and ground handling company.
Financial services declined in weight to 21 per cent, from 23 per cent a year earlier, due to net divestments and lower market valuations, the group said.
Temasek said it continues to invest in capital market infrastructure and wealthtech companies. It has also invested in iCapital, a fintech company focused on providing access to alternative investments.
The group’s unlisted assets continued to exceed its listed assets, by value, with the former making up 53 per cent of its portfolio. These unlisted assets include its investments in large Singapore companies such as property group Mapletree, asset manager Seviora Group and venture capital player Vertex Holdings.
“Over the last decade, the unlisted portfolio has also generated returns of over 10 per cent per annum on an internal rate of return basis, delivering higher returns than our listed portfolio,” Temasek said.
It added that if its unlisted portfolio was marked to market, it would provide S$18 billion of value uplift.
In response to questions on the company’s investments in early-stage companies such as FTX, Temasek’s chief executive Dilhan Pillay said portfolio exposure to these companies is capped at 6 per cent to manage the risk. He added, however, that these early-stage investments have generated returns above industry averages.
“If we were to start punishing people beyond what they have done, who would want to be an investor?
“As long as we’ve done the work required to make the investment, the committee approves, it moves forward,” he said.
He noted, though, that because the investment in FTX caused Temasek reputational harm, more action was warranted.
In May, Temasek announced that its senior management and the investment team involved in the failed investment in FTX had their compensation cut.
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