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GIC Annual Report 2021/22 Managing The Portfolio

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Managing the Portfolio

GIC’s investment strategy is to build a portfolio of asset classes and strategies that generates good long-term real returns, while adhering to the Client’s (the Singapore Government) risk parameters.

3.1

3.1 Overview: Our Portfolio and How We Manage It

Our mission is to preserve and enhance the international purchasing power of the reserves placed under our management by delivering good long-term returns above global inflation.

In 2013, we established an investment framework to help guide us in an increasingly complex and challenging investment environment. This framework maximises GIC’s strengths, including our long investment horizon, significant capital pool, global reach, best-in-class capabilities, and robust governance structure.

Figure 1. GIC’s Investment Framework

Six core asset classes, or ‘beta’ Diversified sources of long-term real returns · · Policy Portfolio Multiple active strategies, or ‘alpha’ Diverse sources of skill-based excess returns · · Active Portfolio Total exposure of all investment activity Within risk limits set by the Client · · GIC Portfolio Operating within the Client’s risk tolerance Operating within the Client’s risk tolerance Total exposure of all investment activity Within risk limits set by the Client · · GIC Portfolio Multiple active strategies, or ‘alpha’ Diverse sources of skill-based excess returns · · Active Portfolio Six core asset classes, or ‘beta’ Diversified sources of long-term real returns · · Policy Portfolio

3.2

3.2 Building the Portfolio

The Client owns the funds that GIC manages and decides on the overall risk that the GIC Portfolio can take in pursuit of good long-term returns.

GIC’s investment process begins with the Policy Portfolio, which defines the key asset classes that drive the GIC Portfolio’s long-term returns. The Active Portfolio aims to add value to the Policy Portfolio through skill-based, active strategies, while preserving the exposure to systematic market risks. Together, the Policy Portfolio and Active Portfolio form the GIC Portfolio.

Policy Portfolio: Key Investment Driver

The Policy Portfolio represents GIC’s asset allocation strategy over the long term. It accounts for the bulk of the risk and return potential of the GIC Portfolio and seeks to balance the way different asset classes respond to different economic environments.

The Policy Portfolio comprises six asset classes: Developed Market Equities, Emerging Market Equities, Nominal Bonds and Cash, Inflation-linked Bonds, Private Equity, and Real Estate. Diversification enables the Policy Portfolio to generate good, risk-adjusted returns over a 20-year period.

The Policy Portfolio has a long investment horizon and is generally maintained through market cycles. GIC’s approach to rebalancing ensures we keep to the allocated ranges of asset classes in the Policy Portfolio. Rebalancing involves systematically buying assets that have decreased in price and selling assets that have increased in price to keep the asset composition in our portfolio steady over time. When an asset class such as equities does particularly well, the rebalancing rule compels us to sell. Conversely, when equities do poorly, such as after the burst of an economic bubble, rebalancing calls for us to buy. There will be rare occasions when GIC adjusts our Policy Portfolio’s asset allocation temporarily in response to medium-term dislocations in the global investment environment in particular assets or in countries.

Figure 2. Asset Class Distribution in the Policy Portfolio

6 4-6% 2 20-30% 1 25-30% 5 9-13% 4 11-15% 3 15-20%

1

Nominal Bonds and Cash

2

Developed Market Equities

3

Emerging Market Equities

4

Private Equity

5

Real Estate

6

Inflation-linked Bonds

Active Portfolio: Skill-Based Strategies

The Active Portfolio comprises a group of investment strategies that adds value to the Policy Portfolio while broadly maintaining the same level of systematic risk.

‘Alpha’ is the additional return achieved by active strategies over and above passive buy-and-hold market returns (or ‘Beta’). At GIC, active alpha activities are separated from beta activities to manage different risk and return drivers clearly. GIC’s alpha activities aim to earn returns from our teams’ skills and competitive advantages.

Each active strategy is funded by the sale of a Policy Portfolio asset class or combination of asset classes with a similar overall risk profile. This funding is the cost of capital for the active strategy, over which the strategy is required to generate additional returns. For example, active strategies designed to outperform public equities are funded from passive public equity holdings in the Policy Portfolio. This way, passive investments in the Policy Portfolio are replaced by an active strategy with the potential for greater returns without increasing the systematic risk of the portfolio.

Figure 3. Construction of an Active Strategy from the Policy Portfolio

The illustrative active strategy “A” has a similar overall risk profile as the weighted combination of three asset classes – Developed Market Equities, Nominal Bonds, and Real Estate. Strategy “A” is therefore expected to generate a return above that of the combination.

Policy Portfolio Each active strategy must generate a return above its cost of capital and is funded through the sale of an asset class or combination of asset classes in the Policy Portfolio with a similar overall risk profile. Active Strategy "A" 1 1 2 2 3 3 4 4 5 5 6 6 1 2 5 Policy Portfolio Each active strategy must generate a return above its cost of capital and is funded through the sale of an asset class or combination of asset classes in the Policy Portfolio with a similar overall risk profile. Active Strategy "A" 1 1 2 2 3 3 4 4 5 5 6 6 1 2 5

1

Nominal Bonds and Cash

2

Developed Market Equities

3

Emerging Market Equities

4

Private Equity

5

Real Estate

6

Inflation-linked Bonds

The GIC Board sets an active risk budget that the GIC Management can use for its alpha strategies. These strategies are stress-tested so we can understand and quantify their performance under various extreme but plausible market conditions, including macroeconomic and geopolitical events. The active risk budget establishes the total level of risk for the Active Portfolio. For example, marketable alternatives or hedge funds typically invest in liquid markets and vary their market exposures via a combination of long and short positions, depending on market conditions. The risk and return profile of this strategy is similar to a combination of Developed Market Equities as well as Nominal Bonds and Cash and will be funded by these asset classes.

GIC Portfolio

Through the Policy Portfolio and Active Portfolio, the GIC Portfolio is diversified across asset classes and strategies, each with a different risk and return profile. Growth assets and strategies, such as equities, generate higher returns but are riskier. Defensive assets and strategies, such as sovereign bonds, offer lower returns for lower risk and protect the portfolio in market downturns. We optimise and allocate across asset classes and strategies, integrating the best possible sources of alpha and beta using a holistic total portfolio perspective.

The GIC Portfolio is constructed to be resilient across a broad range of possible market and economic conditions, while generating good returns above global inflation in the long term.

Principles of Portfolio Construction

In GIC, portfolios are constructed to give them the best chances of achieving their intended purposes over appropriate horizons and within appropriate risk limits. For the GIC Portfolio as a whole, this means achieving good long-term returns over 20 years while limiting potential downside over the shorter term.

In GIC, portfolio construction is founded on the following principles that define the fundamental basis upon which we allocate capital:

Playing to one’s strengths

We allocate to asset classes and active strategies within the GIC Portfolio according to our investment capabilities. This means putting more capital in areas where we think GIC has better access to market opportunities, better understanding and ability to structure and manage the investments, and greater confidence that our investment theses will play out.

Portfolio diversification

This starts with a clear understanding of the real underlying risks of each investment in various scenarios. We then put together different combinations of investments in various amounts and stress-test their overall risk. Finally, we choose the portfolio combination that abides by our risk limits even in bad scenarios and gives us the best prospective return. Such a portfolio will invariably be diversified to a large extent, taking advantage of the fact that risks are not perfectly correlated and therefore work best in combination rather than in concentration.

Disciplined and judicious portfolio management

It is important to ensure that ongoing management of investment portfolios is disciplined and based on good analysis and judgment. The GIC Portfolio is rebalanced regularly to preserve the intended asset class mix. Actively managed portfolios are reviewed regularly in light of changing market conditions and developments in our active management capabilities.

Reference Portfolio

Figure 4. Distribution of Asset Classes in the Reference Portfolio that Characterises the Client's Risk Preference

65% 35%

Equities

Fixed Income

Operating Within the Client’s Risk Tolerance

GIC’s client is the Government, who owns the funds that GIC manages and has characterised its risk preference using a portfolio of 65% global equities and 35% global bonds (“65-35”). We refer to this as the Reference Portfolio. The Reference Portfolio is not a benchmark but an expression of the overall risk that the Client is prepared for the GIC Portfolio to take.

GIC’s investment strategy is to build a portfolio comprising asset classes that can generate good long-term returns above global inflation while adhering to the Client’s risk parameters. There will be differences in exposures and the level of risk between the GIC Portfolio and the Reference Portfolio. GIC allocates to a better diversified range of assets beyond just equities and bonds. We may also adjust our level of risk in times of market exuberance or when significant opportunities arise. This is all part of a disciplined, professional approach to long-term investing.

Governance of the Investment Framework

The investment framework encapsulates the various long-term risk and return drivers for GIC. It also reflects the responsibilities of the GIC Board and Management. The Reference Portfolio characterises the Client’s risk appetite while the GIC Board approves the Policy Portfolio that is designed to deliver good long-term returns. The GIC Management is empowered to add value within the Client's risk tolerance through the Active Portfolio which comprises active, skill-based strategies.

The Investment Board provides an independent layer of oversight on GIC’s active investment management and process. Investment Board members come from the private sector and are not necessarily on the GIC Board. Together, they offer extensive experience in various types of investments across geographies. The Investment Board ensures that GIC invests in a sound and disciplined manner. It also ensures that GIC takes into account potential reputational risks arising from investment activities.

The table below summarises the governance of the investment framework:

Responsibility


GIC Board

  • Approves the Policy Portfolio and active risk budget.


Investment Strategies Committee

  • Reviews GIC Management’s recommendations on the Policy Portfolio and active risk budget.


Investment Board

  • Oversees GIC's active strategies and large investments.

  • Ensures GIC does not incur undue reputational risk in pursuit of returns.


Risk Committee

  • Advises the GIC Board on risk matters.

  • Sets the overall direction of risk management policies and practices in GIC.

  • Reviews significant risk issues arising from GIC’s operations and investments.


GIC Management

  • Designs and recommends the Policy Portfolio.

  • Adds value by constructing and managing the Active Portfolio within the Client’s risk tolerance and GIC’s mandate.


Investment Teams

  • Implement the Policy Portfolio and active strategies.

3.3

3.3 Investment Process

As a disciplined, long-term value investor, we take a systematic, patient, and diversified approach in seeking investment opportunities, differentiating between an asset’s current price and its intrinsic value.

GIC’s investing approach is underpinned by our discipline to distinguish price from value. In the short term, an asset’s price is driven largely by market sentiment, while its value lies in its fundamental worth. Anchored by this perspective, we appraise value diligently and adhere to price discipline, even when it sometimes means going against prevailing market sentiment.

To determine where true fundamental value lies, we use both top-down and bottom-up analyses. We identify and assess drivers of long-term value as a core part of our investment process. In the top-down analysis, we review a country’s macroeconomics, politics, currency, and corporate governance culture, as well as sector fundamentals such as industry structure, drivers, and trends. This top-down approach is similar for both public and private markets. Our bottom-up analyses are more varied and depend on the assets we invest in. For example, in public equities, we focus on the stock’s fundamentals such as the company’s business model and its competitive strengths, balance sheet, profitability, and management. In real estate, our teams conduct bottom-up analyses based on property-specific factors such as location, building quality, tenant mix, lease expiry profiles, and income stream outlook. Our value investing mindset is the common underlying principle.

In all our analyses, looking for value is key. To deliver good long-term returns, we consider all opportunities and risks that could drive investment value in the long run. These considerations, which include the track record, ability, and integrity of management teams and business practices, are integral to our investment process. We expect our investee companies to comply with applicable laws and regulations and apply appropriate corporate governance and stakeholder engagement practices. We also actively advocate long-term thinking in the wider community. We participate in initiatives such as Focusing Capital on the Long Term Global (FCLTGlobal), the International Forum of Sovereign Wealth Funds (IFSWF), and the Task Force on Climate-related Financial Disclosures (TCFD).

3.4

3.4 Technology Investments

As a long-term investor with a global network, GIC is well-placed to invest in technology companies across all stages of their life cycle. Our long-term orientation and flexibility in deploying capital across private, semi-private, and public spaces enable us to grow alongside them and is further enhanced by our multi-asset experience and global footprint. We capitalise on our broad exposure to curate purposeful connections between our partners for meaningful value creation. As technology continues to progress, reshaping industries and spawning new businesses, we refine our approach to finding good companies, technologies, and business models, and apply these to our investment and organisational strategies to give us a competitive edge in today’s challenging environment.

Technology in our Portfolio

GIC has been investing in the technology space since our founding. We started with technology companies listed on the major stock markets and then expanded into venture capital funds when we opened our San Francisco office in 1986. We went into private venture capital earlier than most other institutional investors. Our technology investments also cover all stages of the financing lifecycle of a company — seed (start-up), venture capital (growth), and IPO/public equity (maturity and exit). This has enabled GIC to build strong partnerships with leading technology investment managers and founders over the years.

We are organised to cover both strategic positioning and ground level investing. Our Technology Business Group comprises specialists from different asset classes and regions. It monitors and assesses industry trends and recommends GIC’s overall technology portfolio size, composition, and partnership strategy. Our Technology Investment Group handles most of our early stage investments through venture capital funds, co-investments, and direct investments. We also have sector specialists for public and private market investments.

Given the uncertain and rapid nature of technological disruption, we manage investment risk by diversifying our investments, maintaining a robust investment process, adhering to strict price discipline, understanding the risk-reward calculus, and sizing the investments.

We leverage our core strengths to invest in technology:

3.5

3.5 Technology and Data in GIC

At GIC, we have stepped up our operational capabilities to leverage technology more effectively to harness data, deepen insights, and sharpen our competitive edge when it comes to investing. Even then, the space continues to evolve with the consumption of increasing volume and differentiated types of data, the adoption of new quantitative analysis (including those based on machine learning), and the utilisation of quantitative insights within fundamental investment styles. To meet this changing environment, GIC has brought together quants, strats, technologists, and data scientists with the aim of increasing the use of data and analytics in our investment process and decisions. This has meant increasing ingestion, analysis, and combination of data across all industries and asset classes to enhance investment decisions and investment processes. It has also resulted in technology-led initiatives, which include the linking of research environments across asset classes to enable the easier provision of data across departments as well as the standardisation of UI/UX and back-end infrastructure. These efforts allow GIC to harness the growing complexity and power of technology and data to enable an even more agile response to emergent scenarios and deal opportunities.

3.6

3.6 Investment Implementation

At GIC, long-term portfolio construction and asset allocation are determined top-down by the Economics & Investment Strategy department, while individual investment opportunities are pursued by the bottom-up investment teams. Our core bottom-up investment groups are Public Equities, Fixed Income, Private Equity, Real Estate, and Infrastructure. In addition, our Integrated Strategies department evaluates and invests across public and private asset markets. Our External Managers department oversees external fund managers who supplement the expertise of our core internal investment groups, while the Portfolio Execution department and Investment Services teams further support the implementation of the investment decisions made.

We are open to investing in all countries outside of Singapore, but do not invest in countries that are subject to United Nations Security Council sanctions. We monitor our investee companies and exercise ownership rights, with the intent of preserving and enhancing long-term investment value and protecting the interests of the Client.

Table 1. Teams Involved in GIC’s Investment Implementation Process


Asset Allocation


  • Economics and Investment Strategy

 

Constructs long-term portfolio policy, undertakes medium-term asset allocation, and innovates alternative investment models.


Public Markets

Private Markets


  • Public Equities

  • Fixed Income

  • Portfolio Execution

  • External Fund Managers

 

Invests across developed and emerging markets in equities and fixed income, constructing a diversified portfolio to produce sustainable, risk-adjusted performance.

  • Private Equity

  • Infrastructure

  • Real Estate

  • External Fund Managers

 

Invests in opportunities that have the potential to generate high long-term real returns and the ability to diversify our portfolio.


Private Markets


  • Private Equity

  • Infrastructure

  • Real Estate

  • External Fund Managers

 

Invests in opportunities that have the potential to generate high long-term real returns and the ability to diversify our portfolio.


Cross-Asset


  • Integrated Strategies

 

Invests across public and private asset markets and in less conventional investment opportunities, develops thematic investment strategies, and actively expands GIC's network of relationships beyond traditional domains.


Investment Services


Supports public and private market investment activities.


Economics & Investment Strategy

The Economics & Investment Strategy department articulates GIC’s strategic outlook, determines asset exposures and benchmarks, analyses and implements new return streams and investment models, and optimises the risk-reward of the GIC Portfolio. The department is responsible for GIC’s long-term Policy Portfolio and medium-term asset allocation, as well as capital allocation to internal active strategies.

Investment Groups in Public and Private Markets

GIC invests in both public and private markets. In public markets, we invest in public equities in both developed and emerging markets, absolute return strategies (hedge funds), fixed income, and cash. We manage a diversified portfolio to produce good, risk-adjusted performance. In private markets, we invest in opportunities that have the potential to generate high long-term real returns and the ability to diversify the portfolio. Real estate and infrastructure assets, in particular, also serve as a hedge against inflation.

List of investment groups

3.7

3.7 Managing Risks

Investing involves prudent risk-taking. Identifying and managing risk is therefore a core responsibility of every GIC employee. Each employee has individual accountability and clearly defined responsibilities within our risk management framework. This ensures that risks taken are in line with the risk tolerance set by the Client.

Risk Management Objectives

GIC’s risk management objectives are to protect the Client’s interests and avoid permanent impairment to the Portfolio. The objectives ensure that:

  1. The investment strategies pursued are in line with the Client’s long-term real return objective and risk tolerance;

  2. The risks associated with each investment are well-understood;

  3. Policies, guidelines, and control processes are in place to reduce the likelihood of significant losses to the assets under management; and

  4. Any reputational impact to the Client and GIC due to our actions is carefully managed.

Risk Governance

The GIC Board provides ultimate risk oversight. The Board approves the Policy Portfolio, which is constructed with the Client’s long-term real return objective and risk tolerance in mind. Deviation of asset allocation exposure from policy benchmarks is constrained by a set of operating bands around the Policy Portfolio’s target weights. In addition, the GIC Board sets an active risk budget to limit the risk arising from the deviation of the Active Portfolio from the Policy Portfolio. The GIC Board is supported by the Board Risk Committee, which advises the Board on risk matters. The Board Risk Committee sets the overall direction of risk management policies and practices in GIC. In addition, it reviews significant risk issues arising from GIC’s operations and investments.

The Group Executive Committee is the highest management body in GIC. It deliberates on investment and risk issues before they are submitted to relevant board committees. It is also the forum that assesses and makes determinations on fiduciary risk and reputational risk issues.

The Chief Risk Officer (CRO) is a member of the Group Executive Committee and reports to the Chief Executive Officer (CEO) and the Chairman of the Board Risk Committee. The CRO is accountable to the Board of Directors, primarily through the Board Risk Committee, on all risk-related matters.

The CRO chairs the Group Risk Committee that is vested with the responsibility to oversee implementation of risk policies and review significant risk issues from investments and operations, as well as ensure the resolution of these issues.

Three Lines of Defence

GIC’s risk management model operates along three lines of defence, which ensures that there is clarity and transparency in risk ownership and accountability:

Figure 5. Three Levels of Risk Management

Third Line of Defence Internal Audit Independent assessment and assurance of internal risk management controls Second Line of Defence Risk Management and Control Functions Independent risk control and compliance First Line of Defence Operating Units Risk management by business operations Risk Risk Independent assessment and assurance of internal risk management controls Internal Audit Third Line of Defence Independent risk control and compliance Risk Management and Control Functions Second Line of Defence Risk management by business operations Operating Units First Line of Defence

Risk Management Approach

Our approach to risk management is multi-pronged to address the different types of risk faced by GIC:

  1. Managing portfolio investment risk to ensure that any risk taken is consistent with our mandate and commensurate with expected returns;

  2. Managing legal, regulatory, and compliance risks to safeguard the reputation and interests of the Client and GIC, and to comply with applicable laws and regulations;

  3. Managing tax risk to ensure compliance with the tax laws of applicable jurisdictions;

  4. Managing operational risk through an effective system of internal controls and processes to support GIC's operations;

  5. Managing cyber security, technology, and information risk to ensure that our technology resources and information are well-protected;

  6. Managing counterparty credit risk to minimise the impact to GIC if any counterparties were to default;

  7. Managing reputational risk;

  8. Managing business disruption risk; and

  9. Managing people risk.

This multi-pronged approach to risk management, complemented by the three lines of defence, ensures that risks within the portfolio are looked at in a comprehensive manner. While risks remain, they are well-identified and managed within an established risk tolerance.

GIC's risk management principles

Figure 6. GIC's BCM Programme

3 2 1 BCM Steering Committee Management oversees the BCM programme from GIC’s headquarters in Singapore 1 Department Representatives appointed to ensure smooth execution of any BCM plans 2 Local BCM incident teams ensure consistent and coordinated responses that reflect national standards and latest developments 3 Management oversees the BCM programme from GIC’s headquarters in Singapore 1 Department Representatives appointed to ensure smooth execution of any BCM plans 2 Local BCM incident teams ensure consistent and coordinated responses that reflect national standards and latest developments 3 3 2 BCM Steering Committee 1

Explore sections

  1. 1

    GIC's past reports are available here: https://www.gic.com.sg/reports/

  2. 2

    GIC’s primary metric is the rolling 20-year real rate of return, which we described earlier in this chapter.

  3. 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.

  4. 4

    Volatility is computed using the standard deviation of the monthly returns of the GIC Portfolio over the specified time horizon.

  5. 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”.

  6. 6

    The figures exclude adjustments for costs that would be incurred when investing.

  7. 7

    The Reference Portfolio rates of return are provided on a gross basis, i.e. without adjustment for costs and fees.

  8. 8

    Volatility is computed using the standard deviation of the monthly returns of the Reference Portfolio over the specified time horizon.