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GIC's annualised real rate of return over 20 years dips to 4%
GIC's annualised rate of return over global inflation over the past 20 years fell to 4.0 per cent in the year ended March 2016 from 4.9 per cent the year before, and the manager of Singapore's foreign reserves is guiding for lower returns in the next 10 to 20 years.
On a nominal basis, the portfolio returned 5.7 per cent per year in US-dollar terms over the past 20 years, slightly below the 6.0 per cent annualised return for a reference portfolio that comprises a 65 per cent allocation in global equities and a 35 per cent allocation in global bonds.
GIC said in its annual report: "Looking ahead, we expect a difficult investment environment with modest growth prospects, greater uncertainty and more volatility in the macro economy and markets.
"The long-term (20-year) returns are likely to be significantly lower than what we have seen since 1980."
GIC underperformed its reference portfolio over a five-year period, returning 3.7 per cent in nominal US-dollar terms, compared to 4.6 per cent for its reference portfolio. GIC chief investment officer Lim Chow Kiat said the difference was partly due to GIC's portfolio having a smaller allocation to developed-market equities, in particular the strongly performing US stocks, than its reference portfolio.
He noted that GIC's allocation to Asia is probably higher than most other global investors, because of a view that developed equities are richly valued while emerging equities continue to offer reasonable opportunities.
"Emerging markets is a place that we like," Mr Lim said. "Compared to most investors, we have a slightly higher allocation to that. We continue to see that as offering good returns. That's kind of top-down, asset class. Within emerging markets, we also see opportunities for active management, because they tend to be a little less efficient."
GIC also increased its allocation in nominal bonds and cash to 34 per cent in fiscal 2016, the highest level since it began disclosing portfolio statistics in 2008.
"We have been more defensive in the last one year in particular," Mr Lim said. "We have increased a little bit our allocation to bonds and cash at the expense of some equity exposures, but it's not a drastic type move. It reflects our caution on the overall environment."
Long-term returns for the next 10 to 20 years are expected to be lower. High debt levels in both developed and emerging markets weigh on growth and reduce the effectiveness of policy, GIC said. The global growth outlook is muted, with the risks from rising income inequality, disruptive technologies and negative public sentiment against globalisation and foreign investors complicating the picture.
Starting valuations are also historically high at the moment, and the prospect of rising interest rates could remove some support for current valuations.
Even in the private-equity space, which remains an important asset class for GIC, entry valuations are high, and prospects of returns will probably come from general partners being able to create value from investments.
Mr Lim noted a bifurcation of asset performance. High-quality assets are trading very expensively, while assets that are not market darlings are trading at extremely low levels.
"There's a very significant divergence, especially in the higher-risk markets," he said.
But there are still opportunities, especially in sectors that have undergone big sell-offs, where shorter-term investors have been forced out, such as in natural resources or financials, or in fundamentally sound sectors such as healthcare.
On Japan, Mr Lim said that Tokyo's attempts to revitalise the economy appear to be at another crossroads, but more needs to be done to push through structural reforms. "I wish they make sure that the third arrow is given emphasis. If they can do that, and combine that with the first two arrows, I think Japan has a real chance of coming through well. At this point, we're watching to see what they will do next after the recent elections."
The first arrow is monetary easing, the second is fiscal stimulus and the third, structural reform.
Reform is also the challenge in China, added Mr Lim. "We're monitoring very closely, all these plans that they've announced, when and how they're going to implement it, and if they can do so. I think China will have very good long-term prospects, but they do need to embark on the reforms."