GIC’s mandate 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. GIC’s goal is to beat global inflation, and preserve and enhance the international purchasing power of the reserves placed under its management.
Investment returns in global markets are inherently cyclical and volatile even over 20-year periods. For example, the rolling 20-year real return for a US 65% equities and 35% bonds portfolio went below 2% in the 1980s, but reached as high as 10% in 2000.
Over the 20-year period that ended 31 March 2019, the GIC Portfolio generated an annualised real1 return of 3.4% (see Figure 1). In the last three years, GIC’s 20-year rolling real return has been below 4%. This was essentially due to the exceptionally high returns of the tech bubble period in the late 1990s dropping out of the 20-year window, while the post bubble declines remained (see Understanding the Rolling 20-Year Return below). We expect this one-off effect, coupled with the continuing environment of low returns, to weigh on the rolling 20-year return over the medium term.
1 An annualised real return is the return adjusted for global inflation. The real return number is independent of the currency used to compute it.
2 The first 20-year period since GIC’s inception in 1981 ended in March 2001.
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. It is a rolling return, which means that last year’s 20-year return spans the period 1999 to 2018, this year’s 20-year return spans 2000 to 2019, and next year’s return will span 2001 to 2020. For each new year added, the earliest year is dropped out of the computation window. The change in a multi-year period annualised rolling return from year to year 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
GIC’s long-term performance is largely driven by the dynamics of the global economy and our asset allocation strategy as reflected in the Policy Portfolio. This is complemented by the performance of skill-based strategies undertaken by active strategy investment teams, seeking to add returns above market benchmarks. In aggregate, we strive to achieve the best possible long-term returns for the GIC Portfolio across a variety of economic scenarios, within the risk parameters set by the Client. Our long-term focus is elaborated in Investment Approach (see below) and in the chapter on Managing the Portfolio.
GIC’s long-term investment approach has a few key features. We generate returns from exposure to systematic risk factors, such as the equity risk premium. We invest in illiquid asset classes such as private equity and real estate which offer the prospect of better returns. Exposure to these risk premia enables GIC to harness the power of compounding over time.
In addition, GIC focuses on long-term fundamentals and value rather than on short-term market price gyrations. This reduces the chances of overpaying at market tops or underinvesting at market bottoms. Long-term investing is not a rigid buy-and-hold approach. As a long-term investor, GIC seeks to distinguish price from value. If an asset’s price exceeds its long-term fundamental value, we would tend to sell, and vice versa, even if doing so goes against current market sentiment.
The GIC Portfolio is a well-diversified portfolio of asset classes. Each asset class carries a different risk-return profile. The aim of the Portfolio is to have the right mix of growth assets such as equities which generate higher returns but are riskier, and defensive assets such as sovereign bonds which offer lower returns but help protect the portfolio in market downturns. As the future is uncertain, the GIC Portfolio is constructed to be resilient across a broad range of plausible market and economic conditions, while generating positive long-term real returns.
Table 1 and Figure 3 show the asset mix and geographical distribution of the GIC Portfolio as of 31 March 2019.
|Asset Mix||31 March 2019 (%)||31 March 2018 (%)|
|Developed Market Equities||19||23|
|Emerging Market Equities||18||17|
|Nominal Bonds and Cash||39||37|
While the GIC Portfolio’s asset allocation is constructed to achieve an appropriate long-term balance of risk and return, the geographical distribution of the portfolio is fluid and depends primarily on market capacity, economic cycles and investment opportunities.
While the GIC Portfolio is constructed to deliver good 20-year returns above global inflation as its primary metric, we monitor its ongoing intermediate investment performance. Table 2 shows the nominal USD returns over 20 years3, 10 years and 5 years and the corresponding portfolio volatility.
|Time Period||Nominal Return4||Volatility5|
3 GIC’s primary metric is the rolling 20-year real rate of return, which we described earlier in this chapter.
4 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.
5 Volatility is computed using the standard deviation of the monthly returns of the GIC Portfolio over the specified time horizon.
The GIC Portfolio’s 20-year real return was 3.4% per annum, or 5.5% in nominal USD terms. Over the 10-year period ending March 2019, the GIC Portfolio returned 8.6% per annum in nominal USD terms. These unusually high returns do not reflect the underlying potential of global markets. In particular, the 10-year period included the sharp recovery of the stock markets from the 2009 trough of the Global Financial Crisis. The strong performance of the asset markets over the decade also reflected the unprecedented reductions in interest rates and boost to liquidity globally.
Over the 5-year period, the GIC Portfolio return was 4.9% per annum in nominal USD terms. While the upturn in the global economy and supportive monetary policies helped to push up market valuations, concerns of a slowdown and tightening in liquidity globally drove periodic market corrections.
We also monitor the performance of a Reference Portfolio which comprises 65% global equities and 35% global bonds6. The Reference Portfolio is not a performance benchmark for the GIC Portfolio. Rather, it characterises the risk the Client is prepared for GIC to take in generating long-term investment returns. GIC may occasionally lower its risk exposure, in times of exceptional market exuberance. Conversely, GIC may increase its risk exposure when the opportunity arises. This is part of a disciplined, professional approach to long-term value investing. For example, in the last few years, GIC took steps to lower the risk in the portfolio by reducing its allocation to developed market equities given high asset valuations amidst an increasingly uncertain market outlook (see section on Investing in an uncertain and lower return environment).
Table 3 shows the nominal USD returns over 20 years, 10 years and 5 years and the corresponding volatility for the Reference Portfolio. The figures do not include adjustments for costs that would be incurred when investing.
|Time Period||Nominal Return7||Volatility8|
6 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. It comprises 65% global equities and 35% global bonds. For more details, please refer to the chapter on Managing the Portfolio.
7 The Reference Portfolio rates of return are provided on a gross basis, i.e. without adjustment for costs and fees.
8 Volatility is computed using the standard deviation of the monthly returns of the Reference Portfolio over the specified time horizon.
Over the three time periods, the GIC Portfolio has lower volatility than the Reference Portfolio due to its diversified asset composition. Despite its lower risk exposure than the Reference Portfolio, the GIC Portfolio has performed creditably over a 20-year period.
The investment climate remains challenging over the next few years. High valuations, slowing global growth and significant uncertainties portend lower returns for both the GIC Portfolio and the Reference Portfolio. GIC maintains its cautious portfolio stance.
Despite the increase in market volatility in 2018, market valuations remain elevated across most risk assets. Valuation metrics for the US equity markets and high yield credit continue to be well above historical averages. Global transaction volumes in private markets have exceeded previous peaks and valuations have been driven higher.
Developed markets are now closer to late cycle, particularly in the US, with economic and corporate earnings indicators showing signs of slowing. Further, financial vulnerabilities are growing due to high corporate and non-bank leverage, poorer credit quality and untested liquidity risks. We also expect growth in China to moderate amidst weaker labour force growth and ongoing efforts to reduce the build-up in debt while managing trade tensions with the US. Notwithstanding this, the Fed’s move to delay further rate rises and China’s fiscal stimulus efforts could provide some growth support in the near term.
Over the longer term, market returns are projected to be well below what we experienced since the 1980s. Interest rates are low and current equity market valuations are elevated. The fundamental economic and earnings growth outlook is also expected to be modest due to structural headwinds from demographics, elevated debt, slower rate of globalisation and lower productivity growth. There is limited evidence of structural reforms to counter these trends. Further, the tensions that we highlighted in previous years – around inequality, populism, geopolitical conflicts and the potential impact of disruptive technologies – are likely to persist.
Given the highly uncertain and muted outlook, we will maintain strong price discipline, by not overpaying for assets, and reducing exposure when the risk-reward trade-off is less favourable. We will continue our efforts to strengthen our networks, build capabilities and seek attractive alpha generating opportunities. Our established presence across most asset classes in the emerging markets is also expected to benefit from structural improvement and contribute positively to our longer-term performance.
Overall, our diversified portfolio, disciplined investment approach and flexible capabilities leave us well-placed to invest in this challenging environment. Our teams will also continue to search for compelling idiosyncratic opportunities, and stand ready to take advantage of potential dislocations.