Published by Channel NewsAsia – 10th July 2017
GIC posted an annualised real rate of return of 3.7 per cent per year over the 20-year period ending Mar 31, 2017, in its 2016/17 report, down from the 4 per cent rate of return the year before.
Singapore sovereign wealth fund GIC has delivered steady long-term returns despite maintaining a cautious investment stance in an environment of high uncertainty and low expected returns, it said on Monday (Jul 10).
GIC posted an annualised real rate of return of 3.7 per cent per year over the 20-year period ending Mar 31, 2017, in its 2016/17 report, down from the 4 per cent rate of return the year before. This means the purchasing power of funds invested with GIC in 1997 has more than doubled.
Chief executive officer Lim Chow Kiat said GIC has been relatively cautious due to a combination of “stretched valuations, high policy uncertainty and unresolved economic imbalances”.
As GIC measures its investment performance using a rolling 20-year real rate of return for the total portfolio, it attributed the decline largely to the drop-off of high returns at the beginning of the tech bubble period.
“20 years ago we had a very good year. Here in Singapore, we might think about that time as the Asian Financial Crisis,” Mr Lim explained. “But actually, back then, 1996 really was a very good year for developed markets. Unfortunately, in terms of numbers, we had that year drop out.”
GIC has well over US$100 billion in assets under management, invested in more than 40 countries globally, with a broad geographical distribution.
Its mandate is to preserve and enhance the international purchasing power of Singapore’s reserves placed under its management, by delivering steady long-term returns above global inflation.
It has invested in a mix of growth and defensive assets broadly across six asset classes – developed market equities, emerging market equities, nominal bonds and cash, inflation-linked bonds, real estate and private equity.
Going forward, GIC maintains its outlook for low expected returns over the next ten years due to high valuations, moderate economic growth and earnings expectations, and with interest rates projected to rise over the next decade from current historical lows.
Based on GIC’s reference portfolio, which comprises 65 per cent global equities and 35 per cent global bonds, real returns are expected to come in at around 1 to 2 per cent over the coming decade.
GIC highlighted that while there is heightened uncertainty in economic policy, statistical measures of volatility are low, suggesting that expected returns may not be enough to compensate for the risk.
GIC said developments such as Brexit, the US presidential election and heightened geopolitical tensions belie the sanguine view of market risk as conveyed by standard risk measures.
In theory, GIC said, higher risk goes hand in hand with higher expected returns as investors expect to be compensated more for investing in an asset for which the payoffs are less definite.
It said the outlook for risk assets at the current juncture, however, does not only feature low returns, but also heightened uncertainty amid low measured volatility.
“We’re concerned about that,” Mr Lim said. “It seems to suggest that there is investor complacency.”
FOCUS ON BUILDING RESILIENT, ROBUST PORTFOLIO
In such an environment, GIC said it is focused on building a resilient and robust portfolio, and finding assets with good long-term earning potential at reasonable prices.
GIC will do that through scenario analysis and portfolio diversification, Mr Lim said.
Scenario analysis addresses the inherent uncertainty by considering alternative environments to “stress test” the performance of the portfolio – after which, the investor will consider portfolio actions to reduce risk, or increase exposure in the long term.
Meanwhile, GIC said it is “always on the look-out for assets to provide a different return stream”. For instance, GIC has been investing in student housing in recent years, which it says offers attractive income streams and risk-adjusted returns.
“We keep quite a bit of caution as we have talked about in the last few years,” Mr Lim said. “Even if it means for some years we have to … endure under-performance relative to market, we would do so. Because to us, getting that long-term return is the most important.”
