GIC Cautious About Seeking Higher Returns With Low Yields

Government of Singapore Investment Corp., which manages more than $100 billion of assets, said it’s more cautious about seeking higher returns as yields remain low ahead of the “end game” in the next five to 10 years.

The average annual return on bond yields will be about 1.9 percent over the next decade, while equities may offer a 1.6 percent median real return a year during that period, said Lim Chow Kiat, chief investment officer of the fund, citing different portfolio models.

“We are getting more cautious in reaching out for higher yielding assets,” Lim, who assumed his position in February, said at a conference in Singapore today. “No one can predict when the end game will be, but we can prepare for it.”

Central banks are putting downward pressure on benchmark borrowing costs, leading investors to seek higher-yielding assets outside of government bond markets. U.S. 10-year rates fell to an all-time low of 1.38 percent in July, and the Standard & Poor’s 500 Index rallied to a record this week.

“Central banks will find it hard to exit from this quantitative easing policy,” Lim said, adding that “substantial risks remain.”

Investors have had “largely good returns” over the past three decades, Lim said, and they are seeing the latest part of a 30-year credit expansion cycle with low interest rates.

‘Bubbles Everywhere’

“We see bubbles everywhere,” Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co., said on Bloomberg Television last week. “As long as the Fed, and the Bank of Japan and other central banks keep writing checks and don’t withdraw, then the bubble can be supported.”

GIC said in July its cash allocation almost quadrupled to 11 percent of its portfolio in the year ended March from 3 percent a year earlier. Stock holdings fell to 45 percent from 49 percent as it pared equities in developed markets, while bond investments dropped to 17 percent from 22 percent, it said in its annual report.

The so-called 20-year annualized real return was 3.9 percent as of March 2012, unchanged from the previous year, it said. The annualized nominal rate of return in U.S. dollar terms was 3.4 percent over five years, 7.6 percent over 10 years and 6.8 percent over 20 years, it said. The fund, which doesn’t report an annual return or disclose the actual size of its portfolio, is expected release its next performance figures for the year ended March in July.

More Temptations

“As price of risk assets improve, there are more pressures and temptations to reach out,” said Lim, 42, who previously oversaw GIC’s investments and relationships in Europe, Africa and the Middle East.

Lim said there are investment opportunities in technology, such as China’s growing online retail market, as well as the rising middle class in emerging economies. About one in two middle-class consumers will come from Asia within seven years, he said.

“Though valuations are not low currently, longer-term prospects are not to be missed,” he said.

GIC is ranked the eighth-largest government investment fund globally by the Sovereign Wealth Fund Institute, which estimates it manages $247.5 billion.

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