GIC sees better returns, but outlook uncertain

SINGAPORE — The Republic’s sovereign wealth fund manager GIC generated improved returns in its latest financial year, benefiting from the ongoing recovery in developed markets. But it remains cautious over its medium-term outlook, saying its return may weaken in the coming years amid uncertainties in both developed and emerging markets.

For the financial year ended March 31, GIC’s annualised 20-year real rate of return — which has factored in inflation — rose to 4.1 per cent, up from 4 per cent previously, group chief investment officer Lim Chow Kiat said yesterday during GIC’s full-year results briefing.

“The portfolio also generated a 12.4 per cent annualised nominal return for the past five years, up from last year’s 2.6 per cent, with a lot of that driven by the recovery of global markets, particularly equity markets,” he said. “But over the medium term, we think the return prospect will not be so good, especially compared with the past five years when we had a big recovery in the developed world.”

Despite that recovery, asset yields have continued to decline and are likely to lead to weaker returns for all of GIC’s asset classes, potentially across the next 10 years, while possible higher interest rates are set to create additional headwinds for the near-term outlook, Mr Lim added.

“So in the coming financial year, we will remain focused on how the developed market assets are going to perform as economic recovery continues and how their central bank policies will evolve,” he said. “In the emerging markets, the biggest issue is reforms and we will monitor these developments — in India and China, for example — very closely.”

While the outlook is uncertain, the fact that GIC has so far been able to maintain steady returns is encouraging enough, CIMB economist Song Seng Wun said.

“A 20-year return of 4.1 per cent is satisfying. It shows a long-term consistency that’s really what we’re looking for in a sovereign wealth fund manager,” he said. “And it’s already shoring up on private equity (PE) to buffer against an ageing bull market, where volatilities will continue to emerge.”

In July alone, GIC has announced PE investments into Huaxia Dairy in China and India’s largest e-commerce company Flipkart. These followed similar deals in the last financial year when GIC also invested in companies such as Kronos and iParadigms.

But diversifying its portfolio will remain key for GIC, which also invests in five other main asset types, including developed market equities, emerging market equities, nominal bonds and cash, inflation-linked bonds as well as real estate.

The same principle is applied to geographical distribution, said Mr Lim. “Over the past 15 years, we’ve been building our exposure in emerging markets, particularly Asia. We would continue to want to do more in these markets, but I don’t see us doing this in a big way … The bulk of our portfolio exposure is still in the developed world.”

With well over US$100 billion (S$125 billion) in assets under management, GIC sources its funds from a pool of government funds consisting of current account surpluses, government surpluses and CPF inflows. GIC is aware of its responsibility and a robust framework has been put in place to ensure prudent decision-making, chief risk officer Chia Tai Tee told TODAY.

“For example, we are audited by the Auditor-General yearly and our risk committee meets four times a year, where we go through all our risk policies that govern all our activities,” he said. “You cannot judge by our investment outcome alone and nobody can guarantee that a particular investment can definitely make money. What’s important is that our overall portfolio makes money.”

Against this backdrop, GIC also announced yesterday that Mr S Dhanabalan is joining the group’s board. He will be a huge contribution to the group given his extensive experience in the civil service and financial sector, Mr Lim said.