2
2.1
Overview: Long-term Investment
Performance
GIC’s mandate is to preserve and enhance the international purchasing power of the reserves under our management over the long term, that is, to achieve good long-term returns over global inflation. This is represented by the primary metric for evaluating GIC’s investment performance – the rolling 20-year real rate of return.
This year, the 20-year annualised real return (i.e. the return above global inflation) fell to 2.7%, largely due to a very strong tech-bubble year return in FY1999/2000 dropping out of this 20-year window, and to a lesser extent, the drawdown of global markets over the last year.
In recent years, we have been concerned about high uncertainty and high valuations, which could result in large permanent portfolio impairment. The first order of business was to reduce our exposures to such a risk. While we had not expected a pandemic to be the catalyst for this global downturn, our efforts to diversify and reduce our portfolio risk have enabled us to cushion its impact and better navigate the market turmoil brought on by COVID-19. We describe this approach below.
Figure 1: Annualised rolling 20-year real rate of return of the GIC Portfolio since 2001
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0
Year ended 31 March
Understanding the Rolling 20-Year Return
GIC reports its performance as an annualised 20-year real return, which is the average time-weighted portfolio return over that period. A time-weighted return helps to eliminate the distorting effects on growth rates created by inflows and outflows of money to and from the portfolio.
The return figure is a rolling return, which means that last year’s 20-year return spans the period 2000 to 2019, this year’s 20-year return spans 2001 to 2020, and next year’s return will span 2002 to 2021. For each new year added, the earliest year drops out of the measurement window. The change in this rolling return figure is therefore determined by the returns from the earliest year that drops out and the latest year that is added.
Figure 2: Illustration of a portfolio's rolling 20-year return
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2020
Over the long term, GIC’s performance is largely driven by the dynamics of the global economy and our Policy Portfolio, which reflects our asset allocation strategy. Skill-based active strategies undertaken by our investment teams seek to add returns above market benchmarks. We strive to achieve the best possible long-term returns for the GIC Portfolio across a broad range of economic scenarios, within the risk parameters set by the Client. This is described in greater detail in the chapter on “Managing the Portfolio”.
In the first quarter of 2020, the global equity markets fell sharply as economic growth plunged, following severe disruptions from the COVID-19 outbreak. However, the impact on GIC’s portfolio was cushioned by our diversified portfolio approach, and in particular, our cautious stance in recent years. As highlighted in past reports, GIC had grown increasingly concerned about high asset valuations and high uncertainty, and had therefore reduced our portfolio risk.
2.2
The GIC Portfolio
In line with the decline in equity markets, the proportion of developed and emerging market public equities in the GIC Portfolio fell, while private asset allocation grew as a percentage of the portfolio. The share of bonds and cash rose as these lower risk assets benefitted from the flight to safety. There was little change in terms of geographical mix. Table 1 and Figure 3 show the asset mix and geographical distribution of the GIC Portfolio as of 31 March 2020.
Table 1: Asset mix of the GIC Portfolio
Asset Mix
31 March 2020 (%)
31 March 2019 (%)
Developed Market Equities
15
19
Emerging Market Equities
15
18
Nominal Bonds and Cash
44
39
Inflation-linked Bonds
6
5
Real Estate
7
7
Private Equity
13
12
Total
100
100
Figure 3: Geographical distribution of the GIC Portfolio
GIC’s Portfolio Mix
The GIC Portfolio comprises a well-diversified portfolio with each asset class having a different risk-return profile. For example, growth assets such as public and private equities generate higher returns but are riskier. Defensive assets such as sovereign bonds offer lower returns but have lower risk and protect the portfolio in market downturns. Real estate and infrastructure offer stable, long-term, income-oriented returns, but have higher illiquidity risks than public equities and bonds.
The GIC Portfolio is constructed to be resilient across a broad range of possible market and economic conditions, while generating positive long-term real returns. Asset allocation is our primary focus in portfolio construction. While we do not allocate our assets by country or regions, we monitor our exposures to ensure adequate risk diversification across them. The geographical distribution of the GIC Portfolio mainly reflects the global market composition and bottom-up opportunities sourced by our investment teams worldwide.
2.3
Intermediate Markers of
Investment Performance
While the GIC Portfolio is constructed to deliver good 20-year returns above global inflation as its primary metric, we monitor its ongoing investment performance over intermediate periods. Table 2 shows the nominal (not adjusted for inflation) USD returns over 10 years and 5 years and the corresponding portfolio volatility. We include 20-year nominal numbers for completeness here.
The GIC Portfolio return over the 20-year period was 4.6% per annum in nominal USD terms. Over the 10-year period, the GIC Portfolio returned 5.2% per annum, as it included the prolonged upturn in the capital markets after the 2008 Global Financial Crisis. Over the 5-year period, the GIC Portfolio return slowed to 3.9%, in line with the broader asset markets.
We also monitor the performance of a Reference Portfolio which comprises 65% global equities and 35% global bonds. Table 3 shows the nominal USD returns over 20 years, 10 years, and five years, and the corresponding volatility for the Reference Portfolio.
The Reference Portfolio is not a performance benchmark for the GIC Portfolio but characterises the risk the Client is prepared for GIC to take in generating good long-term investment returns. GIC may occasionally reduce risk exposure in times of market exuberance and take on more risk when the opportunity arises. This is part of a disciplined approach to long-term value investing. For example, given weakening fundamentals and rising market uncertainty, GIC reduced our public equities and credit positions that appeared overpriced in the lead-up to 2020. In addition, we exercised greater caution when evaluating our investment transactions.
Over the three time periods, and particularly over the last five years, the GIC Portfolio had lower volatility than the Reference Portfolio due to its diversified asset composition and pre-emptive measures to lower portfolio risk. Despite this lower risk exposure than the Reference Portfolio, the GIC Portfolio has performed creditably over a 20-year period. This reflects our investment approach to first preserve and then enhance the value of the assets under our management over the long term.
Investing in Private Markets
Given our long-term and flexible investment mandate, GIC was among the earliest institutional investors to invest in private markets, starting with real estate and private equity from the mid-1980s. Today, GIC is one of the largest institutional investors in private markets globally.
Private market investing is important to GIC as it provides portfolio diversification benefits and access to opportunities not available via public markets, particularly in emerging markets. Additionally, in some situations, we can make more meaningful contributions to the investee company by having tighter governance and influence over its management, strategy, and operations. We can better achieve this through a private ownership model, which enables us to leverage our competitive advantages, specifically our long investment horizon, global presence, an extensive network of partners, as well as skilled and experienced teams.
Given the lower beta returns outlook and rising uncertainty in recent years, GIC has been working hard to find attractive alpha-generating opportunities, whilst increasing the overall resilience of the portfolio. Alpha is the additional return achieved by active strategies as compared to the Policy Portfolio, while beta comprises market returns.
This is reflected in our investment approach for the private markets:
Resilient incomes:
We have been investing in defensive sectors such as rental and manufactured housing, logistics and data centres, utilities and transport-based infrastructure and services, as well as in companies with long-term contracted incomes.
Long-term themes:
Given the growth of e-commerce and rapid technological progress, we have been acquiring logistics and data centre assets, as well as equity stakes in FinTech, health-tech and enterprise software companies. In infrastructure, we have invested in sustainability themes such as renewable energy.
Risk management:
We target investments with good risk-reward ratios and impose conservative underwriting standards and scenario stress-testing. Our active portfolio management approach includes monitoring and reporting capabilities at the asset and portfolio level.
Long-term partnerships:
Having a strong global network of contacts and partnerships gives us valuable access to investment opportunities and market insights. We continue to find ways to add value to our partners and investee companies. Given our stable capital, we seek to position GIC as a partner of choice when market dislocations occur.
Navigating a Profoundly Uncertain Investment Environment
In recent years, GIC has taken an increasingly cautious macro stance with our investment portfolio. We observed elevated valuations at a time of weakening market fundamentals and high uncertainties. This was compounded by concerns over geopolitical tensions and limited policy room to manage an economic downturn.
These existing vulnerabilities worsened with the COVID-19 outbreak, which resulted in drastic containment measures and a sharp decline in global demand and economic growth. As set out in Figure 4, equity market volatility rose to levels not seen since the GFC, with the global equity market index falling by over 20% in 1Q 2020. Despite the recent downturn, US equity markets are still trading at levels well above their pre-GFC peaks due to the prolonged run-up over the last 12 years.
Figure 4: MSCI AC World Total Return Index in USD vs volatility
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0
2001
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2003
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2020
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Annualised Volatility (RHS)
Total Return Index (LHS)
Source: Datastream
The repercussions from the COVID-19 pandemic will be wide-ranging. How this plays out across the markets depends crucially on three key factors: the progression of the outbreak and effectiveness of containment efforts; the spillover of the impact from the more vulnerable sectors such as travel, trade, and energy to other sectors; and macro policy responses to stabilise the markets, support economic activity, and keep supply chains open. Already we have seen cuts in interest rates and the swift roll-out of record fiscal packages globally, as governments seek to cushion the impact of the extreme containment measures on businesses and livelihoods.
The timing and shape of the economic recovery remain highly uncertain, especially because there may be subsequent waves of infection around the world. The pandemic has also amplified many existing fundamental issues, such as weakened social compacts, heightened geopolitical tensions, and rising debt levels. As these challenges are likely to be protracted, we can expect more market turmoil ahead.
GIC has been preparing the portfolio for a period of heightened uncertainty. Lessons learned from previous crises such as the GFC, SARS and the dotcom bust have strengthened our investment processes and sharpened our thinking. This, together with our defensive portfolio positioning, leave us well placed to invest in market corrections and opportunities that can enhance our long-term returns.
Importance of our investment principles: ‘Prepare, not Predict’ and ‘Focus on the Long Term’
Amidst this profound uncertainty, what keeps GIC anchored is having a keen understanding about who we are, including our mandate, values, risk capacity, capabilities, and constraints. This in turn drives our two key investment principles - Prepare, not Predict, and Focus on the Long Term.
Prepare, not Predict
This reflects our focus on diversification and robust asset allocation, so that our portfolio remains resilient across a broad range of scenarios. Given the uncharted outlook, having the humility to recognise our own biases and keeping an open and learning mindset are key.
Focus on the Long Term
This principle is essential to our mandate and investment approach. It reflects our emphasis on long-term value and fundamentals over market sentiments. Having a stable source of capital is a significant advantage as it allows us to target durable trends and attractive market entry points as asset prices correct. We also continue to build on our long-term partnerships and capabilities to provide flexible capital.
GIC’s view is that the COVID-19 crisis will bring fundamental changes and even more uncertainty to the global investment environment. A major retreat from globalisation due to heightened geopolitical tensions, supply chain shifts and nationalistic policies, is likely to hurt global productivity growth over the longer term. It will also affect emerging markets that have historically relied on foreign investments and export-led growth. However, Asian economies are likely to adapt their growth strategies and business models over time, and intra-regional trade will strengthen. How well governments respond to the health, economic, and financial challenges will be key drivers of their country’s recovery.
Notwithstanding these challenges, GIC believes that our experiences in managing past crises, diversified and disciplined portfolio approach, and long-term perspective on our investments, strategy, and partnerships, leave us better placed to navigate this difficult and volatile investment environment. As the custodian of Singapore’s reserves, we will continue to focus on our mandate to protect and enhance the value of the reserves under our management and work hard to secure Singapore’s financial future.
More sections
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1
GIC's past reports are available here: https://www.gic.com.sg/reports/
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2
GIC’s primary metric is the rolling 20-year real rate of return, which we described earlier in this chapter.
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3
The GIC Portfolio rates of return are computed on a time-weighted basis, net of costs and fees incurred in the management of the portfolio.
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4
Volatility is computed using the standard deviation of the monthly returns of the GIC Portfolio over the specified time horizon.
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5
The Reference Portfolio was adopted from 1 April 2013 and reflects the risk that the Government is prepared for GIC to take in its long-term investment strategies. For more details, please refer to the chapter on “Managing the Portfolio”.
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6
The figures exclude adjustments for costs that would be incurred when investing.
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7
The Reference Portfolio rates of return are provided on a gross basis, i.e. without adjustment for costs and fees.
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8
Volatility is computed using the standard deviation of the monthly returns of the Reference Portfolio over the specified time horizon.