GIC, which manages more than $100 billion of the city- state’s reserves, said in July it almost quadrupled its cash allocation as it pared bonds and stocks, and European holdings amid the region’s debt crisis. The fund has said its objective is to beat global inflation over a 20-year investment horizon.
“We need to keep the narrow path of generating long-term returns” while “managing the volatility that comes with short- term market movements,” Lim Chow Kiat, deputy chief investment officer of GIC, said at the SALT conference in Singapore.
The MSCI World Index (MXWO) lost as much as 13 percent in the first half of the year before rebounding to a 17 percent gain last month, punctuated by daily market swings with developments such as Spain’s credit rating outlook and monthly U.S. economic data. The market moves follow a year when volatility reached the highest since the 2008-2009 global financial crisis.
“The sovereign wealth funds should not react to short-term market volatility and stick to their investment horizon,” said Victoria Barbary, senior researcher at the sovereign investment lab at Milan’s Bocconi University. “However, they must be able to notice when there is a fundamental shift in market sentiment and react accordingly in order not to damage long-term returns.”
Khazanah Nasional Bhd., Malaysia’s sovereign wealth fund with about 70 billion ringgit ($23 billion) of assets, holds its investments on average for more than 10 years, said Azman Mokhtar, the company’s managing director.
“Good long-term management probably starts with a defense line, which means making sure your balance sheet and your liabilities are all sensibly structured,” Azman said at the same conference yesterday, adding that its investments are mainly “equity-controlled positions in Malaysia or significant positions outside Malaysia.”
The Kuala Lumpur-based fund in January said the value of its holdings fell 7 percent, the first decline in three years, dragged down by “soft” markets.
“It’s imperative for sovereign wealth funds to maintain a long-term perspective,” Scott Kalb, chief executive officer of KLTI Advisors and former chief investment officer of Korea Investment Corp., said in an interview. “They have an inter- generational mandate and have to make sure they don’t have too many short-term obligations.”
Still, swings in stock and bond markets provide investment opportunities. Temasek Holdings Pte, Singapore’s state-owned investment company with S$198 billion ($163 billion) of assets as of March, said in June it sees “sizeable opportunities” amid the crisis as it evaluates the potential investments. GIC also said it may seek new assets.
“Volatility could be an interference with that long-term perspective, but it could also be an opportunity,” GIC’s Lim said, opening “a window for us to pick up some of the assets.”
New investments aren’t likely to sway the longer-term focus for the sovereign funds, said Samarn Trongwaranon, senior director at Thailand’s Government Pension Fund. His fund, which puts 62 percent of its holdings in Thai fixed-income products, typically reviews its asset allocation every two years. Total assets reached 561.6 billion baht ($18 billion) as of Sept. 30, unchanged from June 30, according to its website.
“The long term is a relative concept,” he said at the conference yesterday. “Lately we try to balance volatilities with tactical asset allocation. In general, we didn’t move much from the strategy.”
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