GIC’s mandate is to preserve and enhance the international purchasing power of the reserves under our management over the long term.

GIC’s mandate is to preserve and enhance the international purchasing power of the reserves under our management over the long term. The primary metric for evaluating GIC’s investment performance is the annualised rolling 20-year real rate of return, which recorded 4.3% this year. Similar to recent years, large asset price moves at the start of the 20-year window affected the rolling 20-year return. The rolling off of a year of poor returns in FY2000/01 arising from the dot-com crash coupled with a strong rebound in risk assets over the past year contributed meaningfully to this year’s 20-year return.

See below for more detail on the mechanics behind the calculation of the 20-year rolling return.

Understanding the Mechanics of the Annualised 20-Year Rolling 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 essentially measures the fund manager’s ability to generate returns, as it removes the impact of cashflows into or out of the portfolio and directly attributes the performance to the investment decisions made by the portfolio manager.

The return figure is a rolling return, which means that last year’s 20-year return spans the period 2001 to 2020, this year’s 20-year return spans 2002 to 2021, and next year’s return will span 2003 to 2022. For each new year added, the earliest year is dropped 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.

Even though the rolling 20-year real rate of return is intended to measure returns over the long term, it can still reflect a significant cyclical element. This is particularly evident when the cycles are very pronounced at the start or end of the 20-year window. For example, a 20-year period from 1999 to 2018 would include the sharp rise in valuations resulting from the dot-com boom in 1999 and 2000 and the subsequent bust in 2001, whilst a 20-year period from 2001 to 2020 would be much more negatively affected by the large decline in asset prices from the dot-com bust in 2001.

Over the long term, GIC’s performance is largely driven by the dynamics of the global economy and our Policy Portfolio, which determines our asset allocation strategy. Skill-based strategies undertaken by our active strategy investment teams seek to add returns above market benchmarks. In total, we strive to achieve good and sustainable 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 ‘Managing the Portfolio’.

In 2020, following the lockdowns over broad swathes of the global economy aimed at curtailing the spread of COVID-19, the global economy shrank by 3.3%. This was far worse than the contraction of 0.1% experienced during the Global Financial Crisis. In contrast, equity markets, which fell sharply in March 2020, rebounded robustly in the subsequent year in response to the unprecedented speed and size of global policy intervention, with returns of ~55%. The pace of recovery varied across regions, countries and sectors, depending on their valuation levels following the market drawdown in 1Q 2020, their level of success in controlling COVID-19, the size and efficacy of fiscal and monetary response, and the pandemic’s impact on specific sectors. The markets priced in expectations of a strong economic recovery, given the substantial US fiscal stimulus plan and global rollout of vaccines, which resulted in bond yields rising over 1Q 2021.

Our diversified portfolio and cautious investment stance helped to cushion GIC’s performance from the market correction in 1Q 2020. This posture has continued into FY2020/21 given elevated asset valuations and uncertainty arising from potential inflationary pressures. We have kept our emphasis on being prepared for multiple scenarios, maintained price discipline, added optionality, and expanded our bottom-up investment activities.

As set out in the table below, over the year to end March 2021, the share of emerging market equities rose, while that of nominal bonds and cash fell, in line with the broader market trends described earlier. The share of private equity and real estate increased due to robust deal activity and strong asset performance over FY2020/21.

The geographical distribution of the GIC Portfolio as at 31 March 2021 is set out in figure 3. This mainly reflects the global market composition of our asset allocation strategy and bottom-up opportunities sourced by our investment teams worldwide. While we do not allocate our assets by geography, we monitor our exposures across them.

Figure 3: Geographic mix of the GIC Portfolio as at 31 March 2021

Geographic mix as at March 2021 ⁴: United States (34%); Latin America (3%); United Kingdom (5%); Eurozone (9%); Middle East, Africa, and the rest of Europe (5%); Japan (8%); Asia ex Japan (26%); Global (10%).

While the primary metric for tracking GIC’s investment performance is the 20-year returns above global inflation, we also monitor its ongoing intermediate investment performance. Table 2 shows the nominal (i.e. not adjusted for inflation) USD returns over 10 years and five years and the corresponding portfolio volatility. We include 20-year nominal numbers for completeness here.

Over the 20-, 10- and 5-year periods, the GIC Portfolio returned 6.8%, 6.2% and 8.8% in nominal USD terms respectively, in line with the broader asset markets. The 5-year return was more pronounced due to the greater weight of the strong market recovery in FY2020/21.

We also monitor the performance of a Reference Portfolio which comprises 65% global equities and 35% global bonds. The Reference Portfolio is not a performance benchmark for the GIC Portfolio, but represents the risk the Client is prepared for GIC to take in generating good long-term investment returns. On occasions when GIC’s risk preference differs from the risk profile of the reference portfolio, such as when market exuberance leads to heightened valuations, GIC may choose to lower its risk exposure. 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, given weakening fundamentals and rising market uncertainty, GIC reduced risk-taking in markets that appeared overpriced before 2020.

The table below shows the nominal  USD returns over 20 years, 10 years and 5 years and the corresponding volatility for the Reference Portfolio. Over all 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 in recent years. Over a 20-year period, the GIC portfolio saw a similar return but with much lower risk than the Reference Portfolio. This reflected the value of our long-term investment approach and mandate, which is to first protect and then grow the reserves under our management.

Transitioning to a post-pandemic world

Cautious on macro

The COVID-19 pandemic in 2020 has been one of the toughest economic times in modern history. Not only did we see the largest global economic contraction since World War II, but also the highest synchronisation of national recessions in over 150 years. In contrast, global equity markets recovered sharply from its low in March 2020, rising by 55% over the year to reach new highs by end March 2021 (see Figure 5), as the unprecedented speed and scale of policy intervention globally helped to support jobs, incomes and the capital markets.

Figure 5: Global equity market total returns index in USD

Major central banks in developed markets have declared their intention to keep interest rates low as business and employment conditions will take time to normalise, notably in the markets and sectors hardest hit by the pandemic. Globally, the accommodative policy setting, COVID-19 vaccination rollout and large fiscal stimulus, particularly in the US, are expected to boost economic growth significantly in the near term. Many emerging markets will also benefit from a recovery in global activity, though the cyclical and structural growth story remains highly differentiated.

However, as we extend the horizon of the outlook, the range of outcomes widens substantially. The strength of the global demand upturn depends on the uncertain trajectory of the pandemic. While policy stimulus in major economies has helped cushion the impact of lockdowns on household income, job losses, and corporate insolvencies, exiting from such extraordinary policies could be challenging. A strong recovery amidst abundant liquidity may boost inflation, which could limit policy accommodation. Should bond yields rise and economic growth lag, governments in economies that rely on external funding or lack strong institutional credibility may need to hike taxes or cut spending to cover the budget shortfalls, constraining their policy room. This scenario is also particularly concerning given the sharp rise in global government debt, which reached 87% of global GDP by end 2020 (see Figure 6), the highest level since World War II. Coupled with elevated equity valuations, notably in the US (see Figure 7), this high degree of uncertainty has made us macro-cautious.

Figure 6. Global government debt to GDP

Figure 7. Market capitalisation to GDP

Positive on micro

As we transition to a post-pandemic world, we believe that over the longer term, three major trends will drive markets and open up new areas of growth. These are best captured by our bottom-up portfolio managers and specialists across our offices globally. While we remain macro-cautious, we are micro-positive on these opportunities.

First is the accelerating technological transformation, including new scientific and engineering solutions to be commercialised. Already intensifying digitalisation has enabled companies to scale quickly and spawn new businesses, as discussed in our past reports. New technology will likely disrupt existing business models in many industries including finance, healthcare, automotive, energy and infrastructure. Investors have much to grapple with.

Second, sustainability will continue to be a key priority for GIC. We expect consumer preferences and government policies to continue emphasising the importance of climate-friendly practices. As a long-term investor, we seek to invest into this trend whilst protecting our portfolio assets from being negatively affected; integrate sustainability into our portfolio and investment processes holistically, taking into account the diversity of the industries and markets we operate in; and engage and support our investees and partners in their transition towards sustainability.

Third is the growing influence of geopolitics on capital markets. While geopolitics has always been an important factor for investors to consider in their assessment of opportunities, the increasing rivalry between major powers has elevated its importance in recent years. Indeed, on one particular measure, global political risk rose to a multi-year high in 2020. The range of issues impacted by the strategic competition has broadened beyond trade, and now include technology, data, and market access. Investors will need to navigate these dynamics by diversifying their portfolios while responding nimbly to changing situations.

The COVID-19 crisis has led to fundamental changes in the macro and micro environments. We expect to see continued uncertainty as new norms evolve. We will stay anchored in our mandate, values and investing principles, by emphasising diversification, long-term approach, building optionality, pursuing bottom-up opportunities, and adding value to our partnerships and investments.