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.

For the 20-year period from 1 April 2004 to 31 March 2024, the annualised US$ nominal return of our portfolio was 5.8%. After adjusting for global inflation, the annualised 20-year real return was 3.9%, 0.7 percentage points lower than last year (see Box 1 for more detail on the mechanics behind the calculation of the rolling 20-year return).

Figure 1. Annualised Rolling 20-Year Real Rate of Return of the GIC Portfolio Since 2001

Over the long term, the GIC Portfolio’s performance is largely driven by the dynamics of the global economy, our asset allocation strategy, and skill-based strategies undertaken by our active strategy investment teams that 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 our Client, the Government of Singapore. This is described in more detail in the chapter ‘Managing the Portfolio’.

In 2023, the global economy was resilient despite a sharp tightening in global monetary policy in 2022. Inflation slowed during the year, driving strong performance in global risk assets as markets priced in the prospect of central banks exiting from tight monetary policy. Increased enthusiasm around generative artificial intelligence (AI) also boosted returns in the technology sector, primarily in US markets.

Heightened geopolitical risks persisted as the Russia-Ukraine war continued from 2022. The outbreak of the Middle East conflict in October 2023 added to them. The resulting spectre of commodity and supply chain disruptions increases the risks of resurgent inflation and lower growth.

In the ongoing environment of diverging asset class valuations, macro uncertainty, and heightened geopolitical risks, we continue to emphasise portfolio resilience. We continue to prepare for multiple scenarios, maintain diversification and price discipline, while staying alert to investment opportunities that may arise.

In the year ending March 2024, the share of nominal bonds and cash fell, while that of inflation-linked bonds rose, supporting the portfolio’s resilience to inflation. In addition, the share of private equity in our portfolio increased due to continued deployment of capital and strong returns.

Table 1. Asset Mix of the GIC Portfolio

The geographical distribution of the GIC Portfolio as at 31 March 2024 is set out in Figure 2 below. It reflects the results 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 regions.

Figure 2. Geographic Mix of the GIC Portfolio as at 31 March 2024

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

Table 2. Nominal Annualised Return and Volatility of the GIC Portfolio (in US$, for periods ending 31 March 2024)

Over the 20-, 10-, and 5-year periods, the GIC Portfolio returned 5.8%, 4.6%, and 4.4% in nominal US$ terms respectively. This was reflective of market challenges in recent years that featured sharp falls in returns in fixed income and global equities, particularly in emerging markets. The GIC Portfolio was likewise impacted. Going forward, the environment of compressed risk premia in certain key asset classes, against a backdrop of heightened macroeconomic and geopolitical uncertainty, is likely to continue to weigh on returns. On a total portfolio basis, GIC adopts a conservative strategy and had reduced risk-taking before 2020 in areas that we assessed to be overvalued. We remained cautious in FY2023/24.

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 we are more risk-averse than the risk profile of the Reference Portfolio, such as when market exuberance leads to heightened valuations, we may lower our risk exposure. Conversely, we may increase our risk exposure when the opportunity arises. This is part of a disciplined approach to long-term value investing.

Table 3 shows the nominal US$ returns over 20-, 10-, and 5-year periods and the corresponding volatility for the Reference Portfolio which acts as a risk reference for the GIC Portfolio. Over all three time periods, and particularly over the last five years, the GIC Portfolio had lower volatility than the Reference Portfolio. This was due to our diversified asset composition and preemptive measures to lower portfolio risk in recent years, including an underweight in Developed Market Equities. As a result, over the 5-, 10- and 20-year horizons, the GIC Portfolio had lower returns as Developed Market Equities performed strongly during these periods.

Table 3. Nominal Annualised Return and Volatility of the Reference Portfolio (in US$, for periods ending 31 March 2024)

Despite recent macroeconomic resilience, the global investment environment remains challenging, due to a combination of factors. These include monetary policy settings in the US that may stay tight for longer, macroeconomic challenges in China related to its property market, and continued heightened geopolitical tensions. Moreover, medium-term return prospects remain low, and risk-reward less favourable, given elevated valuations across many risk assets, particularly in developed markets. The prevailing uncertainty underscores the importance of humility in forecasting and reiterates our belief in preparing, not predicting.

The resilience of the global economy has reduced the near-term likelihood of a recession. However, the greater resilience may slow down the disinflation process, which is showing up in elevated rates of inflation in the services sector (see Figure 3). Major central banks that were slated to cut rates this year have either done less than expected or postponed their plans. The key reason is to keep growth below potential and inflation in check as the probability of a recession is reduced.

The challenge for investors is that several key markets are pricing in a very positive outcome as they expect a high growth rate at this point of the cycle. Credit spreads in the US and Europe, in particular, are below or close to their lowest quartile in the past decade. However, there is a wide dispersion across markets and within asset classes. Even as broad markets are challenged, good investment opportunities remain available across markets. This dispersion favours a more bottom-up approach, alongside more nimble capital allocation across different opportunities. This year’s feature article highlights some of our improved capabilities.

Figure 3. Services Inflation Remains Elevated

There are risks to the outlook. If inflation proves more persistent than expected and even increases, core central banks may not only have to keep rates higher for longer but potentially raise them. This would increase recession risks and put strains on households and businesses already struggling with high borrowing costs. Another risk is a more abrupt slowdown in China if there is a further downturn in the property market. Finally, geopolitical risks are rising. Broader unrest in the Middle East, for example, could hamper growth and raise inflation through oil supply and trade disruptions. On the upside, faster adoption and productive use cases of AI could generate higher productivity growth than anticipated.

Beyond the medium term, there are secular forces at play that have implications for the investment environment, as touched on in previous GIC Reports. Inflation and interest rates are expected to settle at higher levels than in the post-Global Financial Crisis and pre-COVID periods (i.e. higher for longer). This is driven by some of the other secular factors discussed in Box 2 below. Reduced appetite for globalisation and structurally higher geopolitical tensions will weigh on productivity, add to inflation, and raise uncertainty, posing headwinds to global growth and complicating the investment environment. Climate change and decarbonisation will impose higher economic costs due, respectively, to physical damage to assets and the green transition. However, the impact on growth from this will be partly countered by increased investment needs and opportunities. Finally, AI offers the prospect of increased productivity, but not all economies and companies are equally prepared to take advantage of it. The adoption of AI also comes with societal risks that governments must proactively manage.

These forces are driving our efforts to build a resilient and agile portfolio to guard against risks in a more uncertain investment environment, while proactively pursuing new opportunities.