Government of Singapore Investment Corp. faces a 6.7 billion Swiss franc ($7.4 billion) loss as the biggest investor of UBS AG (UBSN), topping unprofitable banking investments by the city’s sovereign wealth firms since 2007.
GIC also has about $500 million of unrealized losses on its Citigroup Inc. (C) stake, according to Bloomberg calculations. Temasek Holdings Pte, Singapore’s other state investment company, divested shares in Bank of America Corp. (BAC) and Barclays Plc (BARC) at losses more than two years ago.
UBS shares declined to the lowest level in two-and-a-half years after the Zurich-based bank announced a $2.3 billion unauthorized trading loss that led to the resignation of its chief executive officer on Sept. 24. GIC and Temasek spent more than $25 billion buying stakes in U.S. and European banks in the past four years as the collapse of the subprime mortgage market led to more than $2 trillion in losses and writedowns worldwide.
“The sovereign wealth funds’ investments in international financial firms have not panned out as well as they hoped,” said Melvyn Teo, professor of finance at Singapore Management University. “Whether GIC should continue to hold on to UBS, it really depends on going forward how will the management deal with all the current problems.”
The Singapore firms, ranked among the world’s 10 largest sovereign wealth investors, have since poured more money into higher-growth emerging economies and other industries.
“If we consider a longer-term horizon, then some of the issues like what UBS faces today should not be seen as failed investments,” said Inderjit Singh, a member of Parliament for the ruling People’s Action Party, and CEO of Infiniti Solution Pte, a provider of services to chipmakers. “However, from a Singapore Inc. perspective, with the two sovereign wealth funds not coordinating, I feel they have overinvested in the financial sector.”
The MSCI World/Financials Index declined 26 percent this year, underperforming the MSCI World Index, which has lost 14 percent. UBS shares have declined about 44 percent from this year’s high in February.
GIC “expressed disappointment and concern about the lapses and urged UBS to take firm action to restore confidence,” the bank said in a Sept. 20 statement after its senior management met in Singapore with Oswald Gruebel, who quit four days later as CEO of UBS.
“It may make GIC a lot more reluctant to take a significant stake in a company going forward,” said Teo at Singapore Management University. “If its future investment doesn’t pan out as well and it’s public, it’s going to take a reputational hit.”
GIC, which manages more than $100 billion of the city-state’s reserves, owned about 6.4 percent of UBS as of Dec. 31. It became the bank’s largest shareholder when it converted 11 billion francs of notes into stock. The shares traded at about a fifth of the conversion price at the close on Sept. 23, though the 8.7 billion franc unrealized loss is partly offset by 2 billion francs in interest payments in the first two years of its investment.
The fund also owns about 3.8 percent of New York-based Citigroup, the third-largest U.S. bank, after selling half of its original stake for a $1.6 billion profit two years ago. It’s the lender’s single-biggest investor, while 18 funds managed by State Street Corp. hold a combined 4.1 percent, according to data compiled by Bloomberg.
The average cost of Citigroup shares held by GIC was $29.50 each, after adjusting for a 1-for-10 reverse stock split in May, the Business Times newspaper reported in July. Citigroup traded 15 percent lower than GIC paid as of Sept. 23.
Jennifer Lewis, a spokeswoman for GIC, declined to comment on the fund’s unrealized losses in UBS and Citigroup.
GIC plans to hold on to the banking stakes for “many years” and will only consider selling if there are attractive offers, Tony Tan, the fund’s former deputy chairman, said in January. Tan was sworn in as Singapore’s seventh president on Sept. 1.
Sovereign wealth funds spent more than $70 billion supporting banks in Europe and the U.S. in the credit crisis, according to data compiled by Bloomberg.
“GIC should be able to, as long-term investors, take short-term hits,” said Victoria Barbary, senior analyst at the Monitor Group in London. “That’s why they’re useful capital for companies. Just because they’re holding paper losses doesn’t mean they’re ever going to be realized; they’re not going to be forced to sell them.”
GIC said in its annual report in July that it boosted investments in emerging economies to tap higher returns, and cut back in Europe and the U.S. Emerging-market stocks made up 15 percent of its holdings from 10 percent a year earlier, while those in developed economies fell to 34 percent from 41 percent, it said.
The 20-year so-called nominal annualized rate of return was 7.2 percent in U.S. dollar terms as of the end of March, said GIC, which was established 30 years ago. The annualized real rate of return in excess of global inflation rose to 3.9 percent. GIC also published nominal returns for five- and 10-year periods.
The losses prompted calls for more transparency, and GIC said on Sept. 19 in response to a Today newspaper reader that “the timing for the investment could have been better.”
The opposition Workers’ Party proposed this year that GIC’s annual reports should reflect its yearly performance.
“This will increase transparency and accountability to Singaporeans, who are the ultimate stakeholders and beneficiaries of the investments,” Chen Show-Mao, an opposition member of Parliament said in an e-mail on Sept. 23. Chen quit as the head of New York law firm Davis Polk & Wardwell LLP’s Beijing office in July after winning a seat in the May elections.
Temasek sold its 3.8 percent stake in Charlotte, North Carolina-based Bank of America in the first quarter of 2009 at a loss that may have totaled $4.6 billion. It also sold its 2 percent stake in London-based Barclays. The company, which managed S$193 billion ($147 billion) as of March, didn’t detail the size of those losses. Stephen Forshaw, a spokesman for Temasek, declined to comment.
Financial services companies made up 36 percent of Temasek’s portfolio as of March. It is the biggest investor in lenders including Standard Chartered Plc (STAN), the British bank that earns most of its profit in Asia, and Singapore’s DBS Group Holdings Ltd. (DBS) It also owns stakes in China Construction Bank Corp. and India’s ICICI Bank Ltd.
“In aggregate the financial investments have paid off, especially those in Asia,” said Rachel Ziemba, a director at Roubini Global Economics in London. “But the one in UBS continues to be a headache for GIC, both because of economic losses, but also perhaps because of the reputational risk.”
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