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 that enables us to navigate an increasingly complex and challenging investment environment. This framework leverages GIC’s strengths, including our long investment horizon, significant capital pool, global reach, best-in-class capabilities, and robust governance structure.
GIC’s investment framework
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 bursting 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 or particular assets or countries.
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 return and risk 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 additional systematic risk to the portfolio.
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 Cash, and Real Estate. Strategy ‘A’ is therefore expected to generate a return above that of the combination.
Nominal Bonds and Cash
Developed Market Equities
Emerging Market Equities
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.
Through the Policy Portfolio and Active Portfolio, the GIC Portfolio is diversified across asset classes, with each carrying a different risk and return profile. Growth assets such as equities generate higher returns, but are riskier. Defensive assets such as sovereign bonds offer lower returns for lower risk, and protect the portfolio in market downturns.
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 pick and size 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.
This starts with a clear understanding of the real underlying risks of each investment in various scenarios. Then we 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 that also 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 they work best in combination rather 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.
Distribution of asset classes in the Reference Portfolio which characterises the Client’s risk preference
Operating within the Client’s Risk Tolerance
GIC’s Client is the Government, who owns the funds that GIC manages, and has characterized 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 our Client’s risk parameters. There will be differences in exposures and 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. GIC Management is empowered to add value within the risk limits stipulated by the GIC Board 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 may not necessarily be GIC Board Directors. 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. Additionally, the Investment Board ensures that GIC takes into account potential reputational risks arising from investment activities.
The table below summarises the governance of the investment framework.
Governance of the investment framework
Approves Policy Portfolio and active risk budget
Investment Strategies Committee
Reviews GIC Management’s recommendations on the Policy Portfolio and active risk budget
Oversees GIC’s active strategies and large investments
Ensures GIC does not incur undue reputational risk in pursuit of returns
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
Designs and recommends the Policy Portfolio
Adds value by constructing and managing the Active Portfolio within the risk tolerance in GIC’s mandate set by the Client
Implement the Policy Portfolio and active strategies
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. 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 thoroughly 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 analysis is more varied and depends 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 long-term 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 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).
GIC’s “O-D-E” approach
New forces, from climate change to geopolitical tensions to technological advances, play an increasingly important role in global economies and markets.
To ensure our continued performance over the long term, GIC identifies and organizes major thematic changes using a framework called O-D-E. It is a holistic approach we adopt for our investments and operations. O refers to going on the Offensive when it comes to investment opportunities, D indicates Defensive risk management, and E is the manner in which we constantly improve our operations and processes to achieve Enterprise Excellence.
GIC’s O-D-E framework
In the section below, we explain how sustainability is a key focus area for GIC given its long-term impact on consumer and business behaviour, which in turn affects company valuations as well as the communities our investee companies serve. Technology, a second major theme, has also been increasingly important in shaping GIC’s strategies. (For more information, you can refer to our feature article in our FY2018 Report.) In the table that follows this section, we illustrate how we have applied our O-D-E framework to two major disruptive forces in recent years, sustainability and technology.
GIC’s Approach to Sustainability
Sustainability is core to GIC’s mandate as a long-term investor managing the reserves for Singapore. It is an important investment issue and a key management priority. By sustainability, we mean Environmental, Social, and Governance (ESG) issues that could affect companies’ performance and operations.
GIC was founded in 1981 to secure Singapore’s long-term financial future, and tasked with preserving and enhancing the international purchasing power of the reserves under our management. Ensuring long-term sustainability is therefore an important way for us to fulfil our responsibility.
We believe that companies with stronger sustainability practices will generate better risk-adjusted investment returns over the long term, and this relationship will strengthen over time.
Sustainability trends and ESG risks have a profound and growing impact on both the physical as well as the financial world. These factors shape the long-term prospects of companies, and hence their long-term value. Negative externalities, such as climate change, are also increasingly being incorporated into the decisions of regulators, businesses and consumers. As a long-term investor, we position our portfolio to weather a range of market and economic conditions by taking ESG risks into account at every stage of the investment process, and by supporting our investee companies in their transition towards more sustainable business practices and a low-carbon economy.
GIC’s management views sustainability as a key priority. Our Sustainability Committee, which was formalised in 2016, is tasked to implement our sustainability framework, support and promote sound stewardship, and monitor and respond to emerging ESG issues. The committee engages our Investment Board on broad sustainability trends, emerging risks in our portfolio, as well as potential investment opportunities. These top-down insights are shared and empower our bottom-up teams across all asset classes to make informed decisions when assessing investments.
Our investment teams, through their engagement with the companies’ management and industry experts, are able to gain better insights on a company’s sustainability strategy and long-term positioning. This enables us to make better value comparisons. As a responsible investor, GIC takes a holistic and progressive approach to drive long-term positive outcomes for society. We believe it is more constructive to actively engage companies to support them in their transition towards long-term sustainability, rather than to adopt a blunt divestment approach.
By integrating an ESG lens into our management and investment process, we build resilience and diversification in our portfolio to achieve better long-term returns. Diversification is also essential to GIC’s strategy to secure good long-term returns, and our investments span many sectors and impact many stakeholders. As a responsible steward, we strive to create better outcomes for our portfolio and the communities our investments touch.
Applying O-D-E Framework to Sustainability & Technology
As a long-term investor, we believe that companies with good sustainability practices are likely to generate stronger investment returns over the long term. Our belief in responsible investing and good stewardship drives us to seek better outcomes for our portfolio and the communities our investments touch.
Technology is a force that continues to reshape entire industries. As technology has disrupted traditional industries and spawned new businesses, our investing and organizational efforts in this area have also expanded.
As regulators, consumers, and businesses increasingly act on sustainability considerations, new investment opportunities will open up. We aim to capture these opportunities by:
Integrating sustainability, including climate-related factors, into our investment processes, for example, taking into account ESG factors in due diligence, risk assessment, and post-investment monitoring.
Investing in thematic opportunities arising from climate change, for example, renewable energy assets, “green” buildings, and technologies that support the low-carbon transition.
Incorporating sustainability signals into quantitative strategies, for example, by using proprietary data and analyses.
We gain from technological disruptions by investing in the winners of this shift. This includes:
Investing in rising stars with long-term potential: New technological trends will bring about many promising entrants. As a long-term investor, we want to identify the long-term winners.
Looking out for the large incumbents: While the spotlight is on new companies, we keep a keen eye on incumbent companies who, with their vast resources, are evolving and influencing industry shifts.
Staying agile and adaptable: We keep up with evolving business models by maintaining a flexible mindset towards changing assumptions such as industry classification, pace of change, brand value and the like.
Sustainability trends, including issues around supply chains, resource scarcity, and climate change, pose certain investment risks, such as the risks of physical assets being damaged by extreme weather events, or the financial risks of assets being “stranded” as economies transition to a low-carbon economy. We protect our investments by:
Regularly screening our existing portfolio for a variety of ESG issues.
Conducting additional due diligence for companies exposed to greater sustainability risks, and adjusting our long-term valuation and risk models accordingly. On many occasions, we have chosen not to invest in companies or structures when such risks could not be mitigated.
Actively engaging our portfolio companies to improve corporate governance, ensure resilience against climate risks, and advocate for other positive environment and social outcomes. We maintain regular dialogues with the senior management and boards of directors on these issues. We also vote responsibly across all active and significant holdings.
Supporting the Task Force on Climate-related Financial Disclosures (TCFD): We integrate the assessment of climate change-related risks and opportunities into each step of our investment process. We have developed a set of climate scenarios, which we use to stress-test our portfolio.
As our diversified portfolio holds many established companies, instituting a defensive stance is very important. This requires having a good understanding and assessment of the threats and opportunities faced by the incumbent companies in our existing holdings. We protect our portfolio value by:
Understanding the threats and opportunities driven by the technology shift: One significant benefit from investing in new businesses is a better appreciation of the threats and opportunities faced by incumbent companies. This enables us to more accurately assess the long-term intrinsic value of our portfolio holdings.
Working with investee companies to adjust to technology advances: We share our connections and insights, and work with our existing investee companies to evolve with and adapt to new realities. This is aligned with our long-term partnership approach, and contributes to the continued growth of these businesses in the communities that they operate in.
Sharing our public market insights with new investee companies: GIC has deep expertise in public market investing, and insights on how to operate a public company and manage the street effectively. Our investee companies who are looking to go public find this sharing useful.
The manner in which we operate sustainably as an organization is as important as the way we invest. We do this by:
Procuring sustainably: We communicate clear expectations for sustainable behaviour by our business partners, and do not enter into contracts with those who do not meet our standards.
Encouraging responsible consumption: We do this by cutting down on the use of non-recyclable materials, reducing energy consumption through technology and staff behaviours, and improving the environmental footprint of our office spaces.
Fostering collaboration and inclusion: We believe that an inclusive culture, where our people share a common purpose and sense of belonging, brings about exceptional contribution. Our culture embraces diversity of skills and views, and promotes respect and active contribution, for greater collective impact. You can read more in our “People” chapter.
Aiming to become carbon-neutral in our operations by FY2020/2021, across our 10 global offices.
The investment business is not immune from the same offence and defence considerations. As technology continues to progress, we also need to continue evolving our practices and developing our people by:
Investing in new technologies: We invest significantly in new systems, software and infrastructure to improve decision making and efficiencies across the entire asset management process. For example, our early investment into cloud computing ultimately enabled GIC to adapt quickly to large-scale telecommuting.
Adjusting our processes and structure: We need to ensure digital solutions are relevant and effective. GIC Labs, our in-house technology development centre, creates customised solutions to boost the efficiency of our workforce and the organization. We also embed technology specialists in the investment departments to complement and improve data analytics and insights for deal underwriting and investment decisions.
Adopting a tech-driven and innovative culture: We recognize the need for culture change, including the use of agile methods in our processes, greater experimentation and openness to learn and use new technology.
At GIC, our investment teams work to find attractive bottom-up investment opportunities. Our core investment groups are Public Equities, Fixed Income, Private Equity, Real Estate, and Infrastructure. In addition, our Integrated Strategies Group evaluates and invests in cross-asset investment opportunities. Our External Fund Managers supplement the expertise of our core investment groups, while the Portfolio Execution Group and Investment Services 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 financial interests of our Client.
Teams involved in GIC’s investment implementation process
Economics & Investment Strategy
Constructs long-term portfolio policy, undertakes medium-term asset allocation, as well as innovates alternative investment models
Portfolio Execution Group
We invest across developed and emerging markets in equities and fixed income, constructing a diversified portfolio to produce sustainable, risk-adjusted performance
External Fund Managers
In the private markets, we invest in opportunities that have the potential to generate high long-term real returns and the ability to diversify our portfolio
Integrated Strategies Group
Focuses on cross-asset (public and private), and less conventional investment opportunities, develops thematic investment strategies, and actively expands our network of relationships beyond traditional domains
Supports the public and private market investment activities
Investment Groups in Public and Private Markets
GIC invests in both the 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 assets, in particular, also serve as a hedge against inflation.
List of investment groups
Public Equities Group
Our equity investing effort is carried out by a team of in-house research analysts and portfolio managers, organized along product groups specialising in total return, relative return, and quantitative strategies. The team conducts in-depth due diligence and research to identify businesses with the potential to generate good long-term returns.
Fixed Income Group
GIC Fixed Income is broadly organised along three areas: Global Macro, Global Credit, and Cross-asset Systematic Investing. We invest across the entire fixed income spectrum which includes government bonds, emerging market bonds, corporate bonds and loans, convertible bonds, hybrid securities, securitised products, structured credit, and global currencies. Our multi-asset macro and systematic strategies also invest in asset classes such as equities and commodities.
Private Equity Group
Our private equity (PE) universe includes buyouts, minority growth, pre-IPOs, venture capital, private credit, and special situations such as distressed debt, and secondary PE. We invest in companies directly and through funds. The direct investment programme is focused on taking minority equity positions and providing junior and senior debt financing in buyouts. Our funds strategy aims to identify, and invest with, leading private equity, venture capital, private credit and special situations funds globally, and grow with them in the long run. We have built up a network of over 100 active fund managers. The investment teams add value to the boards and management of the investee companies by providing advice and access to a global network of business links.
Real Estate Group
GIC was an early entrant among institutional investors in real estate. Our investments in the space now include traditional private real estate (brick-and-mortar assets), public equities, real estate investment trusts, and real estate-related debt instruments. Our real estate assets span multiple property sectors, including office, retail, residential, industrial, and hospitality.
Through active asset management, GIC can further generate income and enhance the market value of its assets through tenant management, market positioning, leasing, and capital improvements.
Our infrastructure group takes a multipronged approach to investing. We invest mainly in private infrastructure assets with a high degree of cash flow visibility and which provide a hedge against inflation. These include mature, low- to moderate-risk assets in developed markets, complemented by investments with higher growth potential in emerging markets. We also invest in infrastructure funds, non-investment grade infrastructure debt, and structured investments in listed infrastructure companies.
Integrated Strategies Group
Our Integrated Strategies Group (ISG) focuses on cross-asset (public and private), and less conventional investment opportunities across products and geographies. ISG collaborates with the other groups to jointly invest in large investment opportunities. ISG also invests independently in any of GIC’s asset classes, where appropriate. It develops thematic investment strategies and expands our network of relationships beyond traditional domains.
GIC engages external fund managers to access investment capabilities and opportunities, in various sectors and geographies. External managers enable GIC to gain exposure across public and private markets. They also provide us with valuable investment insights.
Portfolio Execution Group
The Portfolio Execution Group is responsible for implementing liquid market decisions, and is made up of two arms – the Global Trading Unit (GTU) and the Treasury and Portfolio Management Group (TPMG). GTU executes investment decisions across all public market asset classes and provides market intelligence. GTU is organised into four teams – Equities, Fixed Income and Currencies, Liquid Strategies, and Execution Research – and operates around the clock across three centres – Singapore, London, and New York. TPMG is responsible for total portfolio rebalancing, liquidity management, strategy funding, as well as equity beta replication and financing. Our portfolio managers seek efficiency while minimising transaction costs.
GIC has a dedicated investment services team that supports public and private market investment activities. They provide support for deal closing, investment and data operations, investment reporting, management reporting, portfolio accounting, valuation, and financing.
Investing involves prudent risk-taking. Identifying and managing risk is therefore a core responsibility of every GIC staff. Each employee has individual accountability and clearly defined responsibilities within our risk management framework. This ensures risks taken are in line with the risk tolerance set by the Client.
Risk Management Objectives
GIC’s risk management objectives are to ensure that:
The investment strategies pursued are consistent with the risk tolerance set by the Client, and within defined bounds authorised by the Client, Board, and Management.
The risks associated with each investment are understood well.
Policies, guidelines, and control processes are in place to reduce the likelihood of significant losses.
Any reputational impact due to our actions is carefully managed.
GIC’s risk management objectives
The GIC Board provides ultimate risk oversight. The Board approves the Policy Portfolio, which is constructed with our 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 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 responsibility to oversee implementation of risk policies, review significant risk issues from investments and operations, as well as to ensure the resolution of these issues.
Three Lines of Defence
GIC’s risk management model operates along “three lines of defence”, ensuring there is clarity and transparency in risk ownership and accountability:
Three levels of risk management
The First Line: Operating Units
People are the cornerstone of any risk management system. All GIC staff are expected to act with integrity and exercise sound judgement; they need to understand, evaluate, and carefully manage the risks that they take.
All operating units own, and are primarily accountable for, the risks inherent in their activities. They are responsible for ensuring that an appropriate risk-and-control environment and robust processes are in place as part of their day-to-day operations. Our risk assessments are forward-looking and form an important element of our long-term approach. We consider a broad spectrum of risks with potential long-term impact, including sustainability risks and risks from activities managed by appointed agents.
The Second Line: Independent Risk Functions
Risk management and control functions independent of the risk-taking business units are the second line of defence. They provide appropriate day-to-day risk oversight and control. These functions include risk management, legal and compliance, information and technology risk management, as well as tax and finance. While they each have their defined set of responsibilities, they also work collectively to provide the requisite checks and balances to the risk-taking activities of GIC’s investment groups.
The Third Line: Internal Audit
Our Internal Audit Department (IAD) forms the third line of defence. IAD provides independent assessment and assurance on the adequacy and effectiveness of our internal risk management controls. It reports functionally to the Chairperson of the Audit Committee, and administratively to the CEO.
Risk Management Approach
Our approach to risk management is multipronged:
Managing portfolio investment risk to ensure that risk taken is consistent with our mandate and commensurate with expected returns;
Managing legal, regulatory, and compliance risks to safeguard the reputation and interests of GIC and our Client, and to comply with applicable laws and regulations;
Managing tax risk to ensure compliance with the tax laws of applicable jurisdictions;
Managing operational risk through an effective system of internal controls and processes to support GIC operations;
Managing cyber security, technology and information risk to ensure that our technology resources and information are well-protected;
Managing counterparty credit risk to minimise the impact to GIC if any counterparties were to default;
Managing reputational risk; and
Managing people risk
This multipronged 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
GIC’s mandate is to generate good long-term risk-adjusted returns
GIC’s risk management objectives
1The investment strategies pursued are consistent with the risk tolerance set by the Client, and within defined bounds authorised by the Client, Board, and Management.
2The risks associated with each investment are understood well.
3Policies, guidelines, and control processes are in place to reduce the likelihood of significant losses.
4Any reputational impact due to our actions is carefully managed.
Cyber Security, Technology and Information Risk
Legal, Regulatory and Compliance Risk
Counterparty Credit Risk
Managing Portfolio Investment Risk
Policies, guidelines, and processes are established to ensure consistency and clarity across the firm, while reducing the likelihood of significant unexpected losses to the assets under management. The policies and guidelines translate our investment mandate and risk management principles into standards that guide our day-to-day activities. For example, the group-wide investment approval framework sets out the approving authorities for investments based on size. Another example is the cost-of-capital framework which determines an appropriate performance hurdle for each active strategy that includes the cost of funding these strategies and a premium for additional risk undertaken.
We identify, measure, report, and monitor all the risks that are assumed. GIC employs a suite of measures including volatility, risk concentrations, sensitivities to risk factors, liquidity profile, and expected shortfall to identify and analyse the risks in the portfolio from both top-down and bottom-up perspectives. Each measure is designed to highlight a specific aspect of the portfolio that could lead to an undesirable outcome. These statistical measures are supplemented by a set of stress tests and scenario analyses. Reverse stress tests further help to identify otherwise undetected risks that could lead to large or sustained drawdowns. The risk management function sets and monitors performance and risk review thresholds independently to highlight potential changes in risk-taking behaviour and inconsistencies with the stated risk and return assumptions.
Managing Legal, Regulatory and Compliance Risks
Legal and regulatory risks relate to uncertainties in the interpretation and application of laws and regulations, the enforcement of rights or the management of potential litigation, breaches in contracts, laws or regulations. Compliance risk refers to the risk of legal or regulatory sanctions, financial loss or reputational damage arising from non-compliance with applicable laws and regulations.
GIC’s compliance programme comprises robust policies, procedures, effective controls, and monitoring, and surveillance. The implementation of a rigorous compliance programme is underpinned by a strong culture of ethics and compliance. All staff are required to observe the policies and procedures set out in GIC’s Compliance Manual (incorporating the Code of Ethics), comply with all applicable laws and regulations, uphold exemplary conduct, and to act with integrity at all times. Regular and targeted training is conducted and an annual compliance quiz is administered to reinforce awareness and understanding, and to strengthen GIC’s compliance culture. The compliance programme also requires that all staff adhere to their confidentiality obligations and responsibilities.
The investment and operations teams collaborate with the legal and compliance function to manage legal, regulatory, and compliance risks arising from the group’s investment activities. The legal and compliance function monitors compliance with laws and regulations, including laws on securities trading and investment, competition law requirements, financial crimes compliance, and licensing and regulatory approvals. Emerging legal and regulatory issues and proposed regulatory changes are also closely monitored. Additionally, the in-house legal team works with external lawyers to address legal risks.
Managing Tax Risk
GIC’s Tax Risk Management Framework underscores our commitment to be compliant with tax laws, rules, regulations, and obligations set by the respective governments of the jurisdictions in which we invest and operate. We ensure that tax-related decisions are handled with professional skill, care and diligence, and with the relevant documentation that evidences the facts, considerations and decisions taken. We seek written advice, opinion or confirmation, where appropriate, to substantiate our tax positions. Our tax positions and obligations are clearly represented in line with applicable tax laws and regulations. We also engage with tax authorities in an open, constructive, and professional manner.
Managing Operational Risk
All investment and operations staff are required to identify, evaluate, manage, and report risks in their own areas of responsibility, and to comply with established risk policies, guidelines, limits, and procedures. For example, new investment products or strategies are subject to a risk identification and assessment process conducted by a cross-functional group. This ensures that all risks associated with the new product or activity are identified and analysed prior to investment or engagement. We must be satisfied that the required people and infrastructure, including systems, risk modelling, procedures, and controls, are in place to manage these risks before the investment is permitted.
We continuously assess the control environment to ensure that any control weakness is promptly identified and addressed. Policies and procedures are established to safeguard the physical security and integrity of GIC’s technology and data assets. Throughout the year, internal and external auditors scrutinise all operations and business processes. Any deficiencies identified must be addressed within set time frames and reported to senior management. Our business continuity plan is tested and reviewed regularly to ensure that our procedures and infrastructure can support operations in the event of a business disruption. This enhances corporate resilience and safeguards the group’s operations.
Managing Cyber Security, Technology and Information Risk
As GIC adopts advanced information technologies (IT), we recognise the importance of having strong cyber security defences and robust internal controls for our operating environment. A dedicated team of cyber security and IT risk management professionals maintains our cyber defence capabilities, as well as oversees technology operations and use of IT across the organization. With the evolution of our business and the IT landscape, we continue to invest in people, processes and tools to protect GIC’s technology resources and information.
Managing Counterparty Credit Risk
GIC adopts a strong control orientation in managing counterparty credit risk, trading only with financially sound and reputable counterparties. A stringent selection and approval process is in place to appoint counterparties. We review the counterparties and monitor our counterparty exposure against set limits. Counterparty profiles are regularly reported to senior management. Other measures to mitigate credit risk include using netting agreements and programmes requiring counterparties to pledge collateral.
Managing Reputational Risk
Managing reputational risk is part of GIC’s overall risk management framework. Our governance and investment processes ensure that we exercise caution and do not take on undue reputational risk in our pursuit of returns.
Managing People Risk
We require our staff to observe the applicable laws and regulations, GIC’s internal policies and procedures, to conduct ourselves in an exemplary manner at all times and uphold GIC’s fiduciary duty to our Client.
Consistent with our long-term orientation, GIC’s remuneration policies and practices support and reinforce a prudent risk-taking culture, as well as recognize and reward our people on the basis of long-term results. We are committed to developing our employees to their full potential through many learning programmes. We continue to develop a strong leadership bench for GIC, allowing us to build new investment capabilities and extend our investment and operating platforms.
People are at the heart of our business. Our PRIME values serve as the compass in the management of our people, processes and portfolio. The assessment of these values is included in our staff appraisals.
Ensuring Business Continuity at All Times
GIC establishes clear guidelines and processes to reduce the likelihood of significant unexpected losses to the portfolio. Similarly on the operations front, we maintain a robust crisis management and business continuity programme to ensure that we are well-equipped to respond to crisis events and manage the return to business as usual. Crisis events can include, but are not limited to, threats to staff safety or the continuity of GIC’s business operations. A recent example is the COVID-19 pandemic. Having learnt from the experience of the 2003 SARS outbreak, our Business Continuity Management (BCM) team had put in place a detailed plan to respond to an infectious disease outbreak. These were stress-tested through regular exercises, and updated to be in line with industry best practice. When it became clear that the spread of COVID-19 was escalating, we were able to respond swiftly by implementing the precautionary measures in our plans, including split operations and large-scale telecommuting, without compromising our operational capabilities significantly.
A Coordinated, Global Response to Disruptions
Given the potentially extensive impacts of any crisis event, ensuring business continuity is a coordinated effort that involves representatives from all of GIC’s offices and departments.
The BCM Steering Committee, chaired by the Chief Operating Officer, oversees the development and review of GIC’s overall BCM framework, and reports to GIC’s Group Executive Committee. The BCM Steering Committee manages crises with the BCM Working Group and local BCM Incident Management Teams who implement response activities on the ground. During a disruption, they collectively ensure consistent communication, coordination and monitoring across GIC, and timely activation of business continuity plans so that critical business operations can proceed. Additionally, the local teams adjust and implement measures based on the latest national standards and developments.
We also leverage technology for the efficient management of our business continuity programme. A standardised tool that adopts the GIC risk posture is used for data collection, analysis and development of strategies. The tool serves as the central repository for all BCM resources, enabling clarity and transparency.
GIC’s BCM programme was established in 1999. To meet evolving standards and business needs, our business continuity plans are reviewed regularly, through external certifications and internal exercises. Our global programme holds the ISO 22301 certification, the international standard for business continuity management, and maintains this certification through annual external attestations.
We also apply lessons from past crises to the continuous improvement of our BCM programme. In responding to the COVID-19 pandemic, we started with plans developed from our experience with SARS in 2003 and H1N1 in 2009. After two weeks of split operations and exposure to new practices such as contact tracing and quarantine orders, we recalibrated our internal processes to better suit the changing conditions. Through these experiences, we recognize the importance of agility and flexibility to adapt broad plans to cater to each situation.
Business Continuity Management processes
The FSB Task Force on Climate-related Financial Disclosures (TCFD) develops voluntary, consistent climate-related financial risk disclosures for use by companies. We find that it provides a practical framework for companies to disclose their climate-related strategies and investors to make investment decisions for the long term.