‘Cautious’ GIC sees returns dip amid low-yield environment
SINGAPORE — Sovereign wealth fund GIC generated an annualised real rate of return of 3.7 per cent over the 20-year period that ended March 31 this year, marking a second consecutive year of decline.
The rate was down from 4 per cent a year ago, and 4.9 per cent in 2015. Nevertheless, GIC noted that the purchasing power of the funds invested with it in 1997 has more than doubled, and it has delivered steady long-term returns. Publishing its annual report today, GIC said that given the expectation of modest economic growth and earnings, real returns are expected to be lower over the next decade, in a period of protracted uncertainty.
GIC chief executive officer Lim Chow Kiat said that a combination of stretched valuations, high policy uncertainty and unresolved economic imbalances has prompted GIC to take a cautious portfolio stance, having “built a resilient and diversified portfolio”.
“We are prepared for a period of protracted uncertainty and low returns,” he said. “As a long-term value investor ... we have to be prepared for periods of underperformance relative to the market indices, some even for a stretch of several years.”
Last year, developments such as Brexit and the US presidential election heightened apprehension that the post-war globalisation of capital and trade flows can no longer be taken for granted, noted Mr Lim. At today’s market valuations, the universe of high-return opportunities has shrunk significantly, he said. As its rate of return is calculated based on a rolling return, the sovereign fund attributed the decline in returns partly to the drop-off of high returns at the beginning of the tech bubble period, while the ensuing collapse remains within the April 1997 to March 2017 period.
GIC explained that the 3.7 per cent rate of return also takes into account major events over the last 20 years, including the tech bubble in the late 1990s to early 2000s and the global financial crisis in 2008.
The investment group manages over US$100 billion (S$138 billion) in assets, and its portfolio is distributed across six core asset classes — developed market equities, emerging market equities, nominal bonds and cash, inflation-linked bonds, real estate and private equity. Over the past year, GIC said its asset and geographical mix have remained broadly unchanged from a year ago, with roughly a third of its portfolio in Asia and a third in the United States.
The United Kingdom and eurozone account for 18 per cent of the portfolio, with the remaining spread across the rest of America, Latin America, Middle East, Africa and the rest of Europe. A portfolio comprising 65 per cent US equities and 35 per cent US bonds from 1900 to 2017 would generate an average 20-year return of 5.1 per cent, GIC noted.
In May, the investment firm divested part of its stake in UBS at a loss, reducing its ownership in the Swiss bank from 5.1 per cent to
2.7 per cent. GIC did not reveal the price at which the shares were sold, although reports cited banking sources as saying that based on the conversion price and taking into account the interest payments on the notes and dividend payments on the shares, the sovereign fund suffered a loss of roughly 1.8 billion Swiss francs, or about S$2.5 billion on the sale of the shares.
Mr Lim said that the decision to lower the fund’s stake in the Swiss bank was made based on the assessment that there was “better use of capital elsewhere”. Moreover, the regulatory environment has changed, and GIC is constantly evaluating risk-adjusted returns, he said.
GIC said its focus is to “own assets with good long-term earning potential at reasonable prices”. An example is the fund’s investment in student housing in recent years, which offers attractive income streams and risk-adjusted returns, the company said.
Last year, GIC and Singapore-based real estate investor Mapletree Investments helped fuel a record US$16.2 billion of student-housing acquisitions, with a further US$3.3 billion of deals struck in the first quarter of this year, according to Real Capital Analytics. In the past six to 12 months, the
group has increased its private equity investments, said Mr Lim.
GIC-watcher Song Seng Wun, an economist at CIMB Private Bank, noted that investment yields may not show maximum returns every year. Sovereign wealth funds also have to ensure returns that even out over the long run and produce steady long-term returns, he said. “At the end of the day, GIC has to ensure it does well enough to deliver on a sustainable basis,” he added.