Temasek has always looked a little bit different to other sovereign wealth funds. There’s the fact that it’s pretty much all in equities, for a start, either listed or a pre-listing stake; or that 70% of its portfolio is in Asia, with less than a third in what most investors consider the developed world. And now there’s the fact that it reported a 19.2% return in the year to March 31.
That’s not very sovereign wealth fund behaviour at all: most such funds aim for a fraction above inflation, mitigating risk with painstakingly diversified portfolios, and are delighted if long-term numbers reach 7% or so. So, well done Temasek. But there might be a catch.
One of the reasons Temasek achieved such a remarkable return to shareholder (note the singular: there’s only one shareholder, and that’s the Singapore state), creating S$43 billion ($31.3 billion) of value to bring the total portfolio to S$266 billion, is because it has ridden a wave in China. By March 31, China represented 27% of the portfolio, compared with 23% two years ago.
New for old
In the old days, Temasek was fundamentally a vehicle for state holdings in Singaporean assets like DBS and SingTel and Singapore Airlines, with countries like China around the edges as more peripheral stakes; today, China almost matches Singapore, which accounts for 28% of the portfolio, down from 31% a year ago. China Construction Bank alone is worth 6% of the portfolio – the same as home-grown DBS – despite the fact that Temasek sold a chunk of its holding during the year in review.
This has worked exceptionally well lately. Up until June, the Chinese stock market had doubled in a year. But the 30% plunge that followed must be causing some nervous glances in Singapore.
The return and portfolio value figures Temasek released in July are, like any such report, a historical photograph; they’re out of date now, and the question is by how much. In truth, the impact may not be all that different, as much of the rise in China’s market happened after March 31, and the level at the time of writing is roughly the same as it was then. It’s also possible that Temasek sold out of some of those holdings on the way up as the market got toppy (and then, in descent, irrational, as the state tried a host of weird and wonderful measures to prop up the market).
Temasek is an active buyer and seller of assets, making S$19 billion of divestments and S$30 billion of new investments in the year to March 31. Apart from CCB, it also sold part of a stake in Alibaba during that financial year.
But the question remains: should any sovereign wealth fund be exposed to this much volatility?
In one sense, yes. Singapore has two sovereign wealth funds with quite different approaches. The one that looks like the modern, accepted model of a sovereign wealth fund, with a carefully diversified allocation and a long-term time horizon, like an Adia or a Norges Bank, is Government of Singapore Investment Corporation, which exists to diversify foreign exchange reserves and is not allowed to invest in Singapore. GIC and Adia look very similar in a lot of ways. With GIC serving that purpose, Temasek can afford to be different, and it’s not as if Singapore needs the money today.
So Temasek has never been about diversification of asset class, but about hitching its fortunes to long-term commercial and social themes in the emerging world: the rising middle class, industrialisation, more widespread use of financial services, communication.
China is a natural place to play these themes.
But still: more than a quarter of the fund in one emerging market? The concern is not so much about the long-term health of that economy and its companies – though that’s an issue too – as the vagaries of the market itself. The plunge through July proved that China’s stock market is not a sensible or practical place. It has been driven to euphoric highs by quick-to-flip retail investors who have gained their exposure through voluminous margin lending.
And when it started to fall, as markets must, China did not simply let it do so, but intervened, several times over: changing the rules on collateral in margin lending, banning big shareholders (and Temasek certainly counts as one of these) from selling down certain holdings for another six months, encouraging the state pension fund to invest domestically.
One genuinely never knows what is going to come next, and that’s no place for a sovereign wealth vehicle, whose own charter includes a “responsibility to safeguard its past reserves”, to be so heavily exposed.