The latest annual results from Temasek, Singapore’s sovereign wealth fund, are striking for two reasons. First, they answer the question of how badly hit the fund was by the downturn in Chinese stock markets (quite badly, it turned out). Second, they are a reminder of how unique Temasek is in the world of sovereign wealth.
Last year Temasek delivered a 19.2% return, this year a 9.02% loss. The single biggest reason for this was the fund’s China exposure, which stood at 27% of the fund in 2015 (the figure does not seem to be disclosed this year). Temasek’s reporting year runs April 1 to March 31, meaning that in the previous financial year it caught the dramatic rise of Chinese stocks and this financial year, the popping of the bubble and some of the subsequent rebound.
One question was whether Temasek was simply going to ride out the storm and trust its existing holdings or actively manage the portfolio; that question was answered too. The fund, which has a net portfolio value of S$242 billion ($178 billion) as of March 31, made S$28 billion of divestments and S$30 billion of investments during the year, a large turnover for a sovereign wealth fund.
The proportion of the fund invested in Asia ex-Singapore fell from 42% to 40%, but that may in large part reflect market movements rather than divestment from China.
“Temasek continues to be an active investor,” says Lee Theng Kiat, executive director and CEO of Temasek International. “We saw the liquidity-driven market rally earlier in the year and took the opportunity to step up our divestment pace, relative to the past few years.”
He says that the reshaping of the portfolio was not so much geographical, more a realignment to long-term trends in financials, life sciences and the digital space.
It did, however, make new investments in China, including domestic tyre manufacturer Zhongce Rubber and e-commerce logistics platform Cainiao.
Although it trimmed its holdings in China Construction Bank and China Pacific Insurance, Temasek increased its stake in ICBC and invested in Postal Savings Bank of China.Does volatility like this matter to Temasek? The fund has to be seen in the context of what else Singapore has to offer. The Monetary Authority of Singapore invests in low-risk and stable treasuries and its function is to underpin the Singapore dollar. GIC [what was the Government of Singapore Investment Corporation] is a classic sovereign wealth fund, diversified across multiple asset classes and investing purely overseas, managing the government’s foreign exchange reserves with a mission to beat inflation.
Since Temasek is freed of both of those responsibilities, it is able to be different. Its mandate is to earn a spread over its cost of capital over the long-term; and to do so it is 100% invested in equities, albeit some of it pre-listing. That is a model that necessarily involves some volatility, which is why Temasek would much rather point out the fact that it has delivered a total shareholder return of 15% per year since inception in 1974, or 6% over the last 10 years, than the 9.02% loss it suffered this time.
Instead, what really matters to Singapore is that the fund keeps producing a dividend – S$8 billion this time around. Increasingly, that dividend is being used to fund social programmes in Singapore rather than automatically being re-invested. So long as that dividend stays healthy, Singapore Inc will tolerate the wild gyrations that inevitably come with having more than a quarter of the portfolio in China.