Temasek must expand more outside Asia

AT first glance, Temasek Holdings' announcement of its portfolio results for the year ended March 31 seems disappointing. One-year total shareholder return was 1.5 per cent, underperforming its internal risk-adjusted hurdle rate of 8 per cent by a wide margin. It also underperformed common equity indices: the S&P 500 returned 21 per cent, and the MSCI All Country Asia index chalked up a 3 per cent gain. The longer-term track record also appears mixed. Annualised returns since inception in 1974 were impressive at 16 per cent, but the 20-year return of 6 per cent failed to beat its hurdle rate of 9 per cent. Yet comparing Temasek's performance against market indices runs into the classic error of likening apples with oranges. This is because the portfolio is concentrated - over 50 per cent of its holdings are in Singapore and China. It also has about 30 per cent in unlisted assets.

The bigger question is how well it is delivering "sustainable long-term value" through four themes. These include investments in transforming economies, a growing middle class and emerging champions. Its heavy weighting in Singapore and China suggests that it sees a good part of these themes playing out in those areas. To be sure, its portfolio holdings in the transport and industrials sector are strategic assets, such as Singapore Airlines, PSA International and Keppel Corp. But are these corporations able to deliver growth?

Clearly Temasek is betting on Asia as the region most likely to generate growth, evident in its 72 per cent portfolio exposure to Asia. It cites continuing macro uncertainties in Europe and the US; it expects economic growth of under 3 per cent in the US. Yet an expectation of relatively strong economic growth does not necessarily translate into robust returns, as numerous investors in China's equity market have rued. In any case, developments in recent years have highlighted Asia's economic vulnerabilities - its dependence not only on consumption in mature markets, but also on the region's largest economies, China and India, both of which currently face economic challenges.