Singapore State Fund Tackles Markets With New Strategy

GIC Pte, manager of more than $100 billion of Singapore’s reserves, is changing its investment strategy for the second time in three decades to be more flexible as the global outlook becomes “complicated.”

GIC will split its portfolio into one that’s actively managed, and another that tracks the overall market, it said as its annual report showed returns were little changed. The company didn’t say how much of the assets will be managed or indexed against the market.

“In the past 30 years, if you put money into stocks or bonds, you just rode the wave of declining interest rates and made money,” Leslie Teo, chief economist at the sovereign wealth fund, said in an interview yesterday ahead of the release of GIC’s annual report. “In the future, things won’t be so straightforward. Market returns will likely not be as high. Investors will need to be more nimble and skill-based active management may be an additional source of returns.”

The change gives GIC room to shift funds across asset classes as it adapts to challenges after the 2008 global financial meltdown, the European debt crisis and China’s slowdown restricted investment gains. It will also allow the fund to better manage its portfolio amid rising bond yields as the U.S. Federal Reserve considers tapering stimulus with the economy recovering.

Contingency Fund

The company was set up in 1981 as a “contingency fund” with a portfolio that’s as much as 70 percent invested in bonds and cash, before a review in 2000 defined it as a “financial endowment,” which saw equities accounting for 65 percent of holdings, it said.

GIC’s 20-year annualized real rate of return, or gains on top of global inflation that it uses as its main metric, was 4 percent as of March 31, up from 3.9 percent the previous year, it said in its annual report today. The MSCI World Index gained 9.3 percent during GIC’s fiscal year.

“Through the new strategy, we are not aiming for higher risk in our overall investment process,” Chief Investment Officer Lim Chow Kiat said in the interview. “We are just clarifying which returns stem from the market and which are based an particular investment skills.”

GIC’s focus remains on long-term investment results, he said.

The annualized nominal rate of return in U.S. dollar terms over 20 years was 6.5 percent, underperforming a portfolio GIC had created as a benchmark with 65 percent of holdings in stocks and 35 percent in cash, it said. Over the past decade, its 8.8 percent return beat the portfolio’s 8.6 percent gain as it increased its investments in stocks, it said.

Five-Year Return

The five-year return was 2.6 percent, compared with a 3.4 percent gain in the portfolio, it said. The fund, which is owned by the government, doesn’t release yearly return figures or the size of its assets under management.

GIC is ranked the eighth-biggest state fund by Roseville, California-based Sovereign Wealth Institute, which valued its portfolio at $248 billion. Temasek Holdings Pte, Singapore’s state-owned investment company that’s operated separately from GIC, said last month its assets rose 8.6 percent to a record S$215 billion ($169 billion) in the year ended March.

Norway’s Government Pension Fund Global, the world’s biggest, posted a return of 13.4 percent in 2012, the second best in its history, the Oslo-based investor said in March.

More Stocks

Equities at GIC increased to 46 percent in the year ended March from 45 percent a year earlier, it said in the annual report. Bonds rose to 21 percent from 17 percent and it reduced cash holdings to 7 percent from 11 percent a year earlier, it said. Alternative assets, consisting mainly of real estate, private equity and commodities, declined to 26 percent from 27 percent.

Citigroup Inc. and UBS AG, GIC’s two biggest holdings, helped returns. Citigroup increased 21 percent and UBS climbed 15 percent during the fund’s fiscal year. The banks, which GIC bought during the global financial crisis, remain long-term investments, Lim said.

“The financial sector in the West has been healing from the damage of the crisis, with banks building up capital and reporting better profits,” he said. “UBS and Citi have benefited from that healing process.”

European Holdings

GIC’s holdings in Europe declined to 25 percent of its portfolio, down one percentage point from the previous year, according to the report. Those in the U.K. fell to 8 percent from 9 percent, while investments in the euro area were unchanged at 11 percent.

Assets in the Americas rose as the U.S. increased to 36 percent of GIC’s portfolio from 33 percent a year earlier.

“The recent rise in U.S. interest rates reflected its economy being furthest along in recovering from the crisis,” Lim said. “It was a healthy practice run for the eventual normalisation of policy. Particularly for economies and entities dependent on abundant liquidity, it is a good time to start preparing. That said, GIC is not expecting significant policy rate increases in the near term.”

Those in Asia fell to 28 percent from 29 percent as Japan made up 10 percent of the portfolio from 12 percent, it said. In the year ended March, Japan’s Topix index jumped 21 percent, more than twice the gain of the MSCI World Index. The yen lost 12 percent, the worst performer after the South Afrian rand among the 16 major currencies tracked by Bloomberg.

Prime Minister Shinzo Abe has been attempting to spur growth through his policies, known as Abenomics, which consist of what he calls the three arrows of monetary easing, fiscal stimulus and deregulation.

“The movements on the policy front are of course encouraging,” Teo said. “The political consensus is also clear. The question is whether Abe and his team will be able to push through the needed structural reforms. I don’t think it’s easy.”

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