GIC is regenerating itself and pivoting for the future

THIS year marks the 40th anniversary of GIC. We highlight the milestones of our progress as an investment management company and the people and events behind these accomplishments.

BOLD VISION TO CREATE UNIQUE SOLUTIONS

GIC was born of bold vision, the brainchild of Goh Keng Swee, then deputy prime minister and chairman of the Monetary Authority of Singapore (MAS). Departing from prevailing convention, Dr Goh recommended the creation of an entity dedicated to investing Singapore's surplus reserves for better long-term returns. GIC was the outcome of that vision. In retrospect, GIC was the prototype sovereign wealth fund.

The inaugural board, under the chairmanship of Lee Kuan Yew, then prime minister, emphasised three foundational principles that have defined GIC since: the essence of GIC's ethos would be integrity, meritocracy, and boldness of vision; GIC would be a long-term investor; and its primary role would be to assure Singapore's financial security.

LEADERSHIP TO SET THE FOUNDATIONS

Under the watchful eyes of inaugural managing director Yong Pung How, GIC was incorporated as a private limited company so that it could focus solely on managing the foreign reserves, The singular focus was critical as GIC began operations in 1981 when financial markets were stressed by high US interest rates and an emerging market sovereign debt crisis. These did not impede its development.

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GIC witnessed quantum organisational advances during J Y Pillay's tenure as managing director in the second half of the 1980s. Under his leadership, GIC was weaned from MAS, which it had relied on for essential corporate and investment services. A Singaporean management team was groomed, a systematic effort to hire and develop staff started and a structured investment process and robust performance measurement system was installed.

The foundations were tested in 1987's Black Monday when global stock markets tumbled. It was GIC's baptism of fire, but its diversified portfolio weathered the financial market turbulence. GIC learnt first-hand the fortitude it took to live up to the foundational principle set by its board to be a long-term investor.

READINESS TO EXPLORE NEW INVESTMENT HORIZONS

In the 1990s, GIC ventured into new markets and advanced its real estate and private equity capabilities. These advances reflected a readiness to explore new sources of returns for diversification and adapt to unfamiliar investment situations. Lee Ek Tieng, who succeeded J Y Pillay, oversaw these shifts.

The major policy shift was getting GIC to make a foray into emerging Asia. It was a strategic response to the unprecedented transformations in the region, especially in China. GIC's early pivot gave it a head start in a fast-growing region. As most emerging Asian markets then were relatively undeveloped, GIC's public and private market groups had to scour for good investments that met GIC's risk guidelines.

The Asian Financial Crisis, which erupted in 1997, did not shake GIC's conviction in this region. In fact, GIC stepped up its efforts to co-invest with regional partners, usually experts in target sectors, to ensure that it seized investment opportunities with good risk-adjusted returns.

In addition to the growth of the portfolio in Asia, GIC's real estate and private equity investment groups developed dramatically in the same period. This was catalysed by the corporatisation of these groups as subsidiaries, which gave them the autonomy and focus to continue exploring new investment areas.

CLARITY OF PURPOSE AND INVESTMENT OBJECTIVE

The early 2000s saw two reviews on GIC's investment policy and strategy, specifically on its asset allocation policy. Their most consequential finding was that the reserves managed by GIC should be viewed as more than a contingency fund. It was also a financial endowment for Singapore. GIC's mission to generate good long-term returns above global inflation had to meet these two needs.

That reserves were also endowment assets had two important implications. The first was that GIC's portfolio could be less liquid and not so tied to cash and bonds, thus giving it more room to invest in other asset classes. As a result, GIC's strategic allocation pivoted to more public and private equity and real estate.

Second was a Constitutional Amendment for a net investment return (NIR) framework. The NIR framework enabled the government to spend up to 50 per cent of the expected long-term real rate of return of the net assets managed by GIC and MAS (Temasek would be added to the NIR framework in 2016). The NIR framework expresses a spending rule that is aimed at providing for present and future generations of Singaporeans, once again underlining the endowment principle.

A LONG-TERM VIEW TO NAVIGATE CRISES

The global financial crisis (GFC) and the Covid-19 market disruptions have been the two biggest global crises for GIC yet. In both, a prior reduction of equities protected GIC's portfolio. More significantly, GIC committed to its long-term orientation, maintained its strategic holdings and saw through the short-term, marked-to-market losses in the two episodes.

Through the crises, GIC's board and client stood by the principle that a long-term investor had to be prepared to bear short-term losses.

The GFC resulted in the government drawing on past reserves for the first time. This was for a "Resilience Package" which totalled S$20.5 billion, of which up to S$4.9 billion was to be drawn from the reserves to protect jobs and help businesses. The president's approval was sought and granted. The actual amount drawn was S$4.0 billion, and in 2011, the government put back this amount drawn from past reserves.

More than a decade later, Covid-19 prompted the next draw on the reserves. In 2020 and 2021, the government announced Budget measures of over S$100 billion in response to Covid-19. Altogether, the expected draw on past reserves over the two financial years will come up to a total of S$53.7 billion. This is 10 times more than that for the GFC and is equivalent to over 20 years of accumulated budget surpluses. These draws vividly demonstrate the importance of the strategic role of reserves as a rainy day fund to Singapore.

A NEW PHASE FOR GIC

The 2010s saw GIC enter a new phase under the leadership of Lim Siong Guan. These changes manifested GIC's inherent drive to adapt and re-shape itself to improve portfolio performance.

There were two concurrent transformative developments. First, we incepted the New Investment Framework (NIF) which was implemented in April 2013. The NIF clarified governance and risk management; positioned the portfolio for a challenging financial landscape; and enabled better collaboration among the different asset groups.

Second was a corporate makeover. The focus was on refreshing GIC's value system, leadership rejuvenation and a re-alignment towards a "OneGIC" model based on a more collaborative culture among GIC investment groups and strengthening the operating framework, talent practices and corporate infrastructure.

Under the current management team, GIC adapted its strategy for active investments in response to a changing investment environment. The influx of large institutional investors had resulted in a more crowded field for conventional active investments like stock selection and investing in funds. To find value, GIC expanded its investment types that leveraged its unique strengths and capabilities: its long-term orientation, expertise in private and public markets, flexibility to invest in a wide range of situations and its rich network of partners. The strategy shift saw GIC transforming from a largely passive to an active investor aiding its investee companies to grow their businesses.

As the GIC management was charting these developments, the GIC board saw several changes during the same period. In 2011, Lee Kuan Yew retired as GIC chairman, and Tony Tan, executive director, stepped down to take public office. Lee Hsien Loong, Prime Minister, assumed the chairmanship.

BOLD VISION NEEDED TO PREPARE, NOT PREDICT

GIC is pivoting for the future. To continue fulfilling its purpose of securing the financial future of Singapore, GIC must demonstrate bold vision as the future augurs radically different conditions: weaker growth prospects across large economies with rapid growth in public and private debt and ageing populations, low interest rates, high starting valuations across asset classes and technological disruption in all sectors.

Aware of the challenges ahead, GIC is primed to transform its investment approach in significant ways. Strategies being examined include optimising GIC's total portfolio exposures in both alpha and beta, tapping new sources of alpha, improving capabilities to invest in trends like the transition to a lower-carbon economy and deploying technology to sharpen investment decisions.

Culture and talent remain key as GIC looks to expand the power and scope of the existing OneGIC model, to execute with purposeful ambition and agility, and to harness diversity for performance.

GIC is regenerating itself once more.

• This is from GIC Report 2020/21. Lim Chow Kiat is CEO of GIC. Freddy Orchard is former director of economics at GIC and author of the upcoming 'Bold Vision: The untold story of Singapore's reserves and its sovereign wealth fund'.