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GIC 20-year returns ease to 3.4% amid challenging climate

20-year annualised real returns have been inching down; it sees tough investment conditions persisting in next couple of years

GIC, the manager of Singapore's reserves, continues to deliver steady long-term returns, but warns of a challenging investment climate ahead that could pressure its key performance metric.


GIC, the manager of Singapore's reserves, continues to deliver steady long-term returns, but warns of a challenging investment climate ahead that could pressure its key performance metric.

Its benchmark 20-year annualised real rate of return between April 1998 and March 2018 (FY 2018), adjusted for global inflation, was 3.4 per cent above global inflation.

This number was 3.7 per cent for FY 2017 (between April 1997 and March 2017); 4.0 per cent for FY 2016 and 4.9 per cent for FY 2015. In nominal USD terms - not adjusted for inflation - the GIC portfolio returned 5.9 per cent per annum for the 20-year period ended March 31, 2018.

GIC's chief executive officer Lim Chow Kiat said: "The line has come down for the last two to three years even though historically, this number hovered at around four per cent real rate of return over and above global inflation. That's because the high returns at the beginning of the period - the late 1990s - have dropped out of the 20-year window."

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The late 90s were marked by the technology media telecom (TMT) bubble, which fuelled stock markets. GIC's holdings generated good mark-to-market returns.

Looking ahead to the next couple of years, the investment climate remains challenging, with high valuations, slow global growth and significant uncertainties. GIC expects the real returns to be lower. It warned that uncertainties, including tensions around income inequality, populism, geopolitical conflicts and the potential negative impact of disruptive technologies, will still persist.

Declining credit quality, hidden liquidity risks and a proliferation of investment strategies that rely on volatility and rates staying low have contributed to the underlying market vulnerabilities that could amplify any further sell-off.

On whether GIC's benchmark 20-year annualised real rate of return will fall towards 3 per cent, or below like in FY 2009, Mr Lim said:

"It is a sliding window. One year drops out, one year comes in. We of course know what (kind of) year will drop out, but we don't know what kind of year will come in. We can't predict."

Saying that he hoped the annualised real rate of return would not dip below 3 per cent like in FY 2009, he added: "What we can do is to focus on our approach, which is to make sure our portfolio is robust, diversified, able to move through even difficult environments. If there are volatilities, we are ready to take advantage."

Returns in recent years have been better. For the five-year period ended March 31, 2018, the nominal return in USD was 6.6 per cent.

This was higher than the 4.6 per cent achieved for the 10-year period, which included the poor market performance due to the Global Financial Crisis and the European Debt Crisis, and the subsequent recovery due to the aggressive monetary policy intervention. This was attributed to diversification and the cautious stance taken by GIC, which maintains a portfolio profile that is comparable to a 65 per cent equity allocation and a 35 per cent bond allocation.

CIMB Private Bank economist Song Seng Wun said: "It is important to note that GIC is all about long-term returns. "GIC anchors the foundation of our country's overall reserves while Temasek provides an extra layer for the reserves and MAS provides the occasional cream when there are exchange gains. While we may see the 20-year return over the next two or three years continue to dip, once we move beyond 2002, post the dotcom bubble bust, the numbers will start to favour GIC again."

The latest performance by GIC - the world's eighth-biggest sovereign wealth fund with US$390 billion (S$467 billion) of assets under management, according to the Sovereign Wealth Fund Institute - meant the international purchasing power of Singapore's reserves almost doubled during the 20-year period.

Last year was a challenging one. The strong global growth environment has increased the prospects of a larger withdrawal of the decade-long extraordinary monetary stimulus, posing market and economic risks. Along with economic recovery, valuations were stretched further across a broad range of markets. Market volatility, too, picked up, but uncertainty remained elevated.

In view of the high asset valuations, the increased risk of monetary policy tightening across different jurisdictions and the elevated uncertainty, GIC is maintaining a cautious investment stance.

"Nevertheless, we remain ready to take advantage of potential dislocations. The jump in market volatility experienced in early 2018 offered an indication of potentially bigger market turbulence and opportunities in the future," Mr Lim said. He added that GIC has been working hard to identify idiosyncratic investment opportunities. Recent investments included ventures into non-traditional real-estate space like student housing, data centres, technology companies as well as renewable energy and infrastructure.

Mr Lim said GIC's diversified portfolio would be able to hold up relatively well amid trade tensions as the team has prepared for it. But "if the trade tension escalates, it is a matter of how bad it gets to, we would expect some impact. But we certainly are preparing for that as an outcome that has rising probability".

Jeffrey Jaensubhakij, GIC's Group chief investment officer, believes trade disruptions meant the global supply chain would have to change. This will bring about new investment opportunities. "It requires us to think harder and be more nimble," he said.


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