Singapore investor GIC to take ‘cautious’ stance amid lower return expectations

Singapore one dollar bill

Singapore state-owned investment company GIC, which manages the city-state’s reserves, reported on Friday that its portfolio grew more slowly in the fiscal year and warned it expected lower returns to persist ahead.

“Looking ahead to the next couple of years, the investment environment remains challenging. In this backdrop of high valuations, slow global growth and significant uncertainties, we expect real returns for both the GIC Portfolio and the Reference Portfolio to be lower,” GIC said in its annual report released on Friday.

It pointed to a slew of risks, including a “mature” business cycle in advanced economies, especially the U.S., and that China’s growth is expected to gradually slow. It also noted fresh risks from trade protectionism and investment restrictions, as well as existing uncertainties from tensions surrounding income inequality, populism, geopolitical conflicts and disruptive technologies.

“In addition, declining credit quality, hidden liquidity risks, and a proliferation of investment strategies that rely on volatility and rates staying low have contributed to the underlying market vulnerabilities that could amplify any further sell-off,” it said.

State-owned investment company Temasek also pointed to rising risks at its results release earlier this week.

GIC 20-year return declines

GIC’s 20-year annualized return was 3.4 percent above global inflation for the financial year ended 31 March, it said. That was down from a 3.7 percent 20-year annualized return in the previous year. GIC has said its goal is to beat global inflation to preserve and grow the purchasing power of Singapore’s reserves, which it manages.

It said that in recent years, the return has fluctuated around 4 percent, but has been below that level for the past two years.

GIC does not disclose the size of its portfolio, but has indicated it is above US$100 billion.

“The high returns from the beginning of the tech bubble period in the late 1990s have dropped out of the 20-year window, while the post-tech bubble declines have remained in the window,” it noted. “We expect this effect to continue for a few more years, dampening the rolling 20-year return.”

It said its nominal annualized returns in U.S. dollars for the past five years were 6.6 percent, while for the past 10 years, it was 4.6 percent and for the past 20 years, it was 5.9 percent. It noted the 10-year return included the Global Financial Crisis and the European Debt Crisis as well as the subsequent recovery.

“In view of the high asset valuations, the increased risk of monetary policy tightening across different jurisdictions and the elevated uncertainty, we maintain a cautious investment stance,” GIC CEO Lim Chow Kiat said in the report. “Nevertheless, we remain ready to take advantage of potential dislocations. The jump in market volatility experienced in early 2018 offered an indication of potentially bigger market turbulence and opportunities in the future.”

Within the portfolio, developed market equities fell to 23 percent of assets as of 31 March 2018, down from 27 percent a year earlier, it said. Emerging market equities remained at 17 percent of the portfolio, while inflation-linked bonds were steady at 5 percent and real estate stayed at 7 percent, it said. Nominal bonds and cash rose to 37 percent of the portfolio, from 35 percent a year earlier, and private equity rose to 11 percent from 9 percent, it said.

In terms of geography, 19 percent of the portfolio was exposed to Asia ex-Japan, 32 percent the United States, 13 percent the eurozone, 6 percent the United Kingdom and 13 percent Japan, it said.

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