Unpacking the GIC result: why all that effort gets only 3.4%

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By:
Chris Wright
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Should an institution with all that scale and ability be delivering more than this? The problem with long-term numbers is they still reflect issues from 20 years ago.

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The Government of Singapore Investment Corporation (GIC), one of the world’s largest and most sophisticated sovereign wealth funds, released on Wednesday its annual report, including its performance numbers.

The result: its 1,500 employees, known throughout the industry as some of the smartest minds in the business, between them achieved an annualized 20-year real rate of return of 3.4%.

It doesn’t sound much for such a vast and capable investment engine. But there are reasons for this, which remind us that no matter how long the time horizon, numbers always need a closer look.

The problem GIC is facing in its long-term numbers is that in stating performance relative to 20 years ago, it is taking us back to the late 1990s. By then, the tech bubble was in full swing. For a couple of years now, GIC’s numbers have felt the effect of the tech bubble gains falling out of the range while the post-bubble declines are still in there. 

Next year’s return will span 2001 to 2020, so the same problem is going to be evident for a while.

Intergenerational investor

It’s also worth remembering that 3.4% is the return above inflation – the nominal return is 5.5% – and over 10 years the nominal return is 8.6%. But those aren’t the numbers GIC highlights. 

Its mandate is, in part, to beat inflation, hence the ‘real return’ metric; and it wants to present itself as a truly long-term intergenerational investor, hence the 20-year number. But sometimes those numbers are so steeped in dated historical circumstance they don’t do the institution any favours.

What else can we learn from the GIC result? The standout is the considerable drop in the role developed market equities play in the portfolio, from 23% on March 31, 2018 to just 19% a year later. This reflects a view, which CEO Lim Chow Kiat expressed to us in our exclusive interview in the May edition, that developed market stocks are late in their cycle and that value is getting harder to find there.


GIC accompanied its results with an essay on Asia’s growing importance in the global economy and financial markets. But does it live up to that in its allocations? 

The money, apparently, went to three places: emerging market equities were up a percentage point, and nominal bonds and cash were up by two, with private equity taking the remainder. 

An interesting mix, that: two asset classes that are riskier or more illiquid than developed market equities, hedged by a roughly equal allocation to low-risk bonds and cash, which at 39% of the portfolio are now absolutely miles outside the 25%-30% band of the policy portfolio, which serves as a guide on long-term allocation.

What does this mean? GIC sees plenty of risk and is placing historically heavy allocations into low-risk assets to compensate, but at the same time is putting money to work in the challenging asset classes that can generate higher returns. 

It’s interesting that GIC has even been able to increase its private equity weighting – managers there have long complained that they just can’t put the available funds to work in the scale that they would like to, since existing investments keep maturing.

Statement of direction

GIC accompanied its results with an essay on Asia’s growing importance in the global economy and financial markets. But does it live up to that in its allocations?

Perhaps: 32% of the portfolio is in Asia. But 12% of that is in Japan. That said, it’s true that 20% in Asia ex-Japan is higher than, say, MSCI allocations to that region (the MSCI World Index, for example, allocates 11.6% to emerging markets and a further 1.55% to Asia ex-Japan). And it also has to be remembered that GIC can’t invest in its home base of Singapore.

Today the biggest single allocation is still 32% to the US, but that’s low in comparison to benchmarks (using the MSCI World again, the US is 53.64% of that index). So even if Asia doesn’t yet dominate investment allocations, there’s a statement of direction being made in the portfolio today.

Temasek is next up, on July 9. That institution, being entirely in equities, tends to show far bigger swings than GIC, and reports its returns on an annual as well as a long-term view. It’s also taken a bigger bet on Asia itself, even notwithstanding the home bias that comes from its legacy as an investment vehicle to hold Singapore state holdings. 

Key questions here will include how the fund has handled China allocations in the face of a trade war, and just how an equity-only fund positions for risk when it can’t, like GIC, retreat into bonds and cash.