Singapore sovereign wealth fund GIC recorded a dip in real returns in its latest review as it expects the global economic and geopolitical outlook to be more uncertain.
GIC's 20-year annualised real rate of return - its most important benchmark - was 3.7 per cent for the year ended March 31, down from the previous year's 4 per cent, it noted in its latest annual review.
This means GIC enhanced its portfolio by an average return of 3.7 per cent per year, over and above the global inflation rate between April 1997 and March this year. This also means that the purchasing power of funds invested with GIC has more than doubled since 1997.
The decline in its latest 20-year annualised real rate of return was due to the cyclical effect - to years being added and dropped as the 20-year window moves. The 20-year timeframe is used as GIC's mandate is to preserve the purchasing power of Singapore's foreign reserves.
"GIC's mandate is to achieve good long-term returns over global inflation. The primary metric for evaluating GIC's investment performance is the rolling 20-year real rate of return. The goal is expressed in real terms because GIC must, at a minimum, beat global inflation and preserve the international purchasing power of the reserves placed under its management," GIC said.
While the latest result shows GIC has managed to achieve steady returns, the investment environment has also become more challenging in recent years, which means GIC is having to "work a lot harder to find assets with good long-term potential at reasonable prices", said chief executive Lim Chow Kiat.
A key concern is rising uncertainty co-existing with low volatility. Brexit, the US presidential election and a rise in the scourge of terrorism have all contributed to heightened uncertainty in geopolitics and the outlook for the world economy.
Yet financial markets have remained calm and continue to perform well. At the same time, asset values have been driven up by investors hunting for yield - making high returns harder to come by.
This has created a challenging investment environment, Mr Lim said. He noted that returns are expected to remain low over the next decade, and GIC has taken a relatively cautious portfolio stance in view of the uncertain outlook.
"We are prepared for a period of protracted uncertainty and low returns," he said, adding that GIC has sought to keep its portfolio robust by diversifying across regions, asset classes and risk levels.
"As a long-term value investor, we remain cautious and recognise that to generate good real returns over time, we have to be prepared for periods of underperformance relative to the market indices, some even for a stretch of several years."
Mr Lim said GIC has its eye on assets with strong long-term prospects, including infrastructure, student housing and technology-related investments.
GIC was one of the first institutional investors to move into the student housing market and has since become a major player. In March, a joint venture entity formed by GIC, the Canada Pension Plan Investment Board and US real estate operator The Scion Group acquired three US student housing portfolios for about US$1.6 billion (S$2.2 billion).
"We are always on the lookout for assets that can produce a different return stream and student housing is one of those," said Mr Lim, adding that GIC expects to continue to be active in the student housing market.
GIC is also deploying more capital towards private equity investments, Mr Lim said. Its long-term approach means less liquid asset classes such as private equity and real estate can offer better returns.
Maybank Kim Eng economist Chua Hak Bin said GIC is facing a tough investing environment amid policy uncertainty, high stock market valuations and low bond yields.
It is also facing more competition from other sovereign wealth funds that are also hunting for returns - driving up asset prices and making it tougher to find good deals.
"This means GIC has to make sure to remain disciplined and avoid overpaying for assets," he added.
The Sovereign Wealth Centre puts GIC's assets under management at about US$353.6 billion.