Sovereign wealth funds are having a tough time finding good investments amid the difficult economic environment, and Singapore's GIC is no different.
Stock market volatility and low yields across various other asset classes amid flagging global growth have combined to create a challenging environment for state investors.
But GIC is no stranger to buying when the outlook appears bleak, and its recent investments point to a willingness and ability to ride out short-term volatility with a view to potential long-term payoffs.
GIC's main objective is to maintain the purchasing power of Singapore's reserves, which it does by investing in relatively conservative assets such as real estate, bonds and selected stocks.
It has more than US$100 billion (S$135 billion) in assets under management.
The fund is usually tight-lipped about its investments but based on public information, it is still scooping up buys amid an ongoing global economic slowdown.
"It's true that GIC, like all sovereign wealth funds, is facing a tough investment environment in which equities markets are volatile and bonds expensive," says Mr David Evans, senior writer and editor at the London-based Sovereign Wealth Center.
"But it's important to remember that GIC's intergenerational focus means it can afford to ride out periods of volatility and execute countercyclical investments that will potentially pay off over the longer term."
GIC has a 20-year investment horizon and its ability to take a long-term perspective has been one of its key strengths.
Indeed, part of the reason why the fund's property holdings are so concentrated in Asia - with about 50 per cent of its real estate assets in the region - is because it was buying in the late 1990s in the wake of the Asian financial crisis.
Amid the current global downturn, GIC has retained its focus on emerging markets, many of which have been hit hard over the past year by capital outflows and currency volatility on the back of a strengthening United States dollar.
Over 20 years ending March last year , GIC's real rate of return was 4.9 per cent per year, according to its latest annual report.
But it does not expect this level of returns to continue.
"The current high asset prices are likely to result in low returns over the next five to 10 years," the fund said when it released its annual report last July.
"The results underline the point that to benefit from long-term investing, we have to be prepared to tolerate short-term unrealised losses."
Amid the current global downturn, GIC has retained its focus on emerging markets, many of which have been hit hard over the past year by capital outflows and currency volatility on the back of a strengthening US dollar.
For instance, the state fund has invested in Brazilian real estate and power distribution assets "because it remains confident in Brazil's future economic prospects, despite the country's recent problems", says Mr Evans.
A recent investment in Brazil was the purchase of a 12 per cent stake in Rede D'Or Sao Luiz, Brazil's largest hospital chain, last December. This brought GIC's total stake in the hospital chain to 28 per cent.
Indeed, the strategy of buying when the outlook appears bleak is not new to GIC, says CIMB Private Banking economist Song Seng Wun. "In a strong growth environment, returns might be better but assets also tend to be more expensive. Now the investment environment is challenging and we've experienced many years of sub-normal growth, but not all industries or companies are doing poorly."
The Singapore state fund marked a number of other investing milestones recently.
GIC made its first foray into Indonesia's logistics sector earlier this month, when it teamed up with the country's publicly listed logistics developer PT Mega Manunggal Property to develop logistics warehouses in Indonesia over the next three years.
In a sign that developed markets remain key, it also entered into its biggest stock transaction in eight years when it injected US$1.23 billion in cash to buy 19.9 per cent of ITC Holdings, a US electricity transmission giant.
The major deal is the latest in a string of significant acquisitions by GIC in North America.
While the current uncertain environment provides "many excellent investment opportunities", it also entails a higher level of risk, says Dr Johan Sulaeman, an assistant professor at NUS Business School's Department of Finance.
"Promising investment opportunities seem to be geographically concentrated as Chinese and European markets continue to struggle," he notes.
"One potential drawback of this strategy is that institutional investors now have significant exposures to these regions... GIC should make sure that its bets in various sectors in the Americas are not overexposed to the US political and economic cycles."
The sovereign wealth fund also announced last week that it is deepening its management bench in a bid to boost investment capacity amid an increasingly challenging environment.
The firm has created new senior investment roles focusing on asset classes like private equity, infrastructure and real estate, while also expanding the portfolios of some existing senior leaders.
This approach will allow more flexibility to look for global investment opportunities within each asset class, says Dr Sulaeman.
Ultimately, GIC's strategy of cashing in on short-term price volatility in order to generate good real returns over the long term is intended to eventually benefit Singaporeans.
This is thanks to the net investment returns framework, which allows the Government to spend up to half of the long-term expected real returns from the GIC, the Monetary Authority of Singapore and Temasek Holdings.
These investment returns pay for rising spending on social welfare, including income support for older folk and needy families.
"(GIC has) a simple mandate - to deliver consistent returns, which will allow the Government to plan the Budget with a certain degree of confidence," says Mr Song.
"They are answerable to their key stakeholder, the Government, and ultimately to Singaporeans."
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