Sovereign wealth fund GIC continues to deliver steady long-term returns, but warned yesterday of a challenging climate ahead.
Its benchmark 20-year annualised real rate of return between April 1998 and March this year was 3.4 per cent above the rate of global inflation. This number was 3.7 per cent for the 2017 financial year, 4 per cent for 2016 and 4.9 per cent for 2015.
"The line has come down... even though historically, this number hovered around 4 per cent real rate of return over and above global inflation," chief executive Lim Chow Kiat said at a briefing yesterday. "That is because the high returns at the beginning of the period - the late 1990s - have dropped out of the 20-year window."
GIC noted that the investment climate looks to remain challenging over the next few years with high valuations, slow global growth and significant uncertainties. Mr Lim said GIC's diversified portfolio would be able to hold up relatively well as the team is preparing for the worsening trade rows. "If the trade tension escalates, it is a matter of how bad it gets to, we would expect some impact. But we certainly are preparing for that as an outcome that has rising probability," he said.
Group chief investment officer Jeffrey Jaensubhakij said trade disruptions meant the global supply chain would have to change, bringing opportunities to tweak the portfolio, adding: "It requires us to think harder and be more nimble."
GIC also warned that uncertainties, including tensions around income inequality, populism, geopolitical conflicts and the potential negative impact of disruptive technologies, still persist. "Nevertheless, we remain ready to take advantage of potential dislocations. The jump in market volatility experienced in early 2018 offered an indication of potentially bigger market turbulence and opportunities in the future," Mr Lim said.
If the trade tension escalates, it is a matter of how bad it gets to, we would expect some impact. But we certainly are preparing for that as an outcome that has rising probability.
GIC CHIEF EXECUTIVE LIM CHOW KIAT
It is maintaining a cautious investment stance given high asset valuations, the risk of rising interest rates and heightened uncertainty.
In nominal US dollar terms - not adjusted for inflation - GIC's portfolio returned 5.9 per cent a year for the 20 years to March 31. That period included the poor market performance due to the global financial crisis and the European debt crisis.
Mr Lim outlined the strategy ahead: "What we can do is to focus on our approach, which is to make sure our portfolio is robust, diversified, able to move through even difficult environments. If there are volatilities, we are ready to take advantage." GIC's approach is to look at "risk and reward. We just don't see the risk-reward ratio to be so good that we want to be fully invested. Currently, prices are certainly not factoring in or expecting that kind of outcome, so that makes the investor's perspective of returns going forward to be particularly unfavourable".
CIMB Private Bank economist Song Seng Wun said: "It is important to note that GIC is all about long-term returns. GIC anchors the foundation of our country's overall reserves, while Temasek provides an extra layer for the reserves and the Monetary Authority of Singapore provides the occasional cream when there are exchange gains. While we may see the 20-year return over the next two or three years continue to dip, once we move beyond 2002, post-dot.com bubble bust, the numbers will start to favour GIC again."
He added that annual fluctuations or near-term decline in the numbers is unlikely to threaten the contribution that GIC makes to the Government's coffers as the current framework is based on long-term returns rather than yearly numbers.