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GIC posts 4.9% real return in past 20 years; sees tougher times ahead

The sovereign wealth fund says volatile markets could chip away at its returns in the next five to 10 years, and short-term losses are possible

GIC group chief investment officer Lim Chow Kiat says GIC is now more engaged with its partners and investee companies, and is working more closely with external managers.


GIC posted annualised real returns of 4.9 per cent in the past 20 years ending on March 31, 2015 - higher than 2014's 20-year real return of 4.1 per cent.

The sovereign wealth fund has warned, however, that volatile markets could lower its returns for the next five to 10 years.

In its 2014/15 annual report, GIC said the returns between April 1995 and March 2015 have been ahead of global inflation, which has averaged between 2 and 3 per cent.

However, GIC group chief investment officer Lim Chow Kiat said on Wednesday that the historical high returns are not expected to continue.

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Current valuations are high and likely to result in low returns over the next five to 10 years - and maybe even short-term loss, he told reporters upon the release of GIC's report.

While asset prices have risen strongly, the outlook for economic growth and earnings has not kept up, Mr Lim said.

The sharp rise in asset prices came mainly from central banks' monetary easing over the past five years.

"Fundamentals have not kept up, especially over the last five to six years," he added.

For example, the cyclically adjusted earnings yield for US equities fell from 7.5 per cent during the Great Financial Crisis to 4 per cent at end May 2014, and further to 3.7 per cent at end May 2015.

"The results underline the point that, to benefit from long-term investing, we have to be prepared to tolerate short-term unrealised losses," GIC said.

The agency which manages the foreign reserves of the Singapore government said that, in US dollar nominal terms, the portfolio generated an annualised return of 6.1 per cent over the 20 years - lower than the 6.9 per cent reference portfolio adopted two years ago. (The reference portfolio is made up of 65 per cent global stocks and 35 per cent global bonds.)

Mr Lim attributed this lower return largely to GIC's "very conservative policy, under which it keeps a large part of its portfolio in cash.

GIC's lower risk profile over 20 years is indicated by the lower volatility for the portfolio at 9 per cent; that of the reference portfolio was 10.8 per cent.

In US dollar nominal terms, GIC's portfolio returns over the past five years was 6.5 per cent, and for the last 10 years, 6.3 per cent; the reference portfolio for the five and 10 years were 7.2 per cent and 6.1 per cent respectively.

GIC's lower five-year return against the reference portfolio is due to its having relatively less developed market equities in the last five years, said Mr Lim.

During that period, developed market equities, especially those in the US, did particularly well, he said.

GIC has diversified into other asset classes, in particular emerging market equities and private markets.

Bonds and cash remain its largest asset class at 32 per cent, up from 31 per cent a year ago.

For the remaining asset classes of developed-market equities, emerging-market equities, inflation-linked bonds, real estate and private equity, there was little change.

In terms of geographical allocation, the largest shift was in Asia - 30 per cent from 27 per cent a year ago. The gains were in North Asia, India and South-east Asia.

On China's roller coaster stockmarkets, Mr Lim said most institutional fund investors' exposure was via the H-shares listed in Hong Kong, which have lower volatility.

China's market reforms will not be derailed by the current bout of measures introduced by the government to prop up the stockmarket, he said.

"We would like to see more investments in China," he said especially in the new parts of the economy.

GIC is believed to have some US$350 billion in assets, though its official line is that it has "well over US$100 billion in assets" invested in more than 40 countries.

It contributes to the government coffers via the net investment returns contribution (NIRC), a sum of S$8.1 billion last year.

GIC is a major NIRC contributor, the other being the Monetary Authority of Singapore; in February, Deputy Prime Minister and Finance Minister Tharman Shanmugaratnam had proposed including Temasek Holdings as a contributor.

Mr Lim, offering an update on GIC's two-year-old "more active approach" towards investment, said GIC was now more engaged with its partners and investee companies, and is working more closely with external managers. (About 20 per cent of GIC funds are managed by external managers.) This closer collaboration includes co-investing, making introductions and structuring investments, including spinning off companies.

In 2013, a GIC Integrated Strategy Group, a team of 12 people, began looking at investments which do not fit into standard asset classes, lest these fall through the cracks. For instance, the group might look at a convertible bond issue which has equity and fixed-income elements.

Analysts said GIC's cautious outlook is to be expected, given that the decade of cheap money is coming to an end, with the US Federal Reserve about to start hiking interest rates.

Chua Hak Bin, Bank of America Merrill Lynch's head of Emerging Asia Economics, said: "We think this is a major regime change."

Tighter global monetary conditions will likely mean a rougher ride for asset prices, especially in emerging markets, he said.

OCBC Bank economist Selena Ling said that, given the absolute size of GIC's portfolio, the very long-term investment horizon and illiquid nature of its real estate and private equity investments, it is understandable that some short-term unrealised losses may have to be stomached, especially during market turning points and bouts of elevated volatility.

"Bear in mind that the mandate and investment perspective of a sovereign wealth fund will differ from that of a traditional fund manager," she said.

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