GIC to further boost emerging-market exposure

The larger of Singapore's two sovereign wealth funds (SWFs) will continue the trend among state investment arms of building exposure to emerging markets, especially in Asia, its chief investment officer confirmed in a speech yesterday.

However, the Government of Singapore Investment Corporation's (GIC's) annual report, published this week, maintained another trend among SWFs – giving little away about its allocations and investment plans.

Still, such scraps of information are to be welcomed from entities like the Abu Dhabi Investment Authority and Singapore's Temasek Holdings, even if they have some way to go to achieve the transparency levels of the likes of Norway's state fund Norges Bank Investment Management.

GIC's chief investment officer, Ng Kok-Song, told the CFA Private Wealth Management Conference in Singapore yesterday that the organisation had recently reviewed its investment policy with regard to asset allocation and would further increase its exposure to emerging markets. 

He cited by way of explanation the slower growth forecast for developed economies over the next decade because of a prolonged period of deleveraging and fiscal austerity.

GIC economists expect global GDP growth to average 3.8% this year, with advanced economies expanding at 2.4% and emerging Asia growing at 8%. The output level of emerging Asia has fully recovered and now stands 12% above the pre-crisis level, said Ng, whereas output in the developed economies remains 2% below their level two years ago.

Between 2000 and 2010, Asia’s share of world GDP rose from 28% to 34%, he added. Moreover, Asia will contribute 50% to global growth this year, although its share of global GDP is 34%. China’s contribution to global growth will be 26% and India’s 10%, compared with 15% from the US and 10% from Euroland.

“Since World War II, no other country except China has changed the landscape of global growth that quickly,” said Ng.

The increasing focus on emerging markets extends a strategy that began seven years ago when GIC carved out emerging-market equities from global equities and treated it as an asset class in its own right, he noted.

Over the last seven years, the market index for emerging Asian equities returned 14.4% annually, compared with 4.6% for developed-market equities. As of March 31 this year, GIC’s exposure to emerging markets in public equities alone was 10%, or about one-fifth of global public equities.

Ng pointed out that Goldman Sachs recently projected that in the next 10 years to 2020, the emerging market share of global market capitalisation will rise from 31% currently to 44%. Adjusting for lower free-float ratios and foreign investment restrictions, notably for China, the benchmark index weight is expected to rise from 13% at present to 19% in 2020.

Moreover, the 'home-country' bias of many institutional investors “will increasingly undergo a mindset change”, said Ng, in terms of both asset allocation and investment process.

GIC's principal investment instruments for emerging markets will remain listed equities, he added, but there are promising opportunities in real estate and private equity, something that other SWFs seem to be considering.

GIC's annual report for the year to March 31 contains similar information about allocations, along with performance data, although it does not go into much detail. GIC's funds' 20-year nominal average rate of return per year was 7.1% in US dollar terms. The real rate of return, in excess of global inflation, was 3.8%.

Deputy chairman Tony Tan says in the report: “GIC started to selectively take on more risk from the second quarter of 2009 amidst growing confidence in the economic recovery. I am pleased that the 20-year return of the portfolio has improved."

Meanwhile, GIC will establish a facility for a medium-term strategy with regard to asset allocation that will enable the SWF to make “calibrated departures” from the policy portfolio, stated the report. The aim is to allow it to respond more flexibly to significant risks or opportunities.

The geographical distribution of GIC's investments had hardly changed at all from March 31, 2009. Its asset class allocation, however, has shifted. As of March 31, year-on-year the proportion of AUM in listed equities had risen to 51% from 38%, exposure to fixed income had dropped slightly from 24% to 20% and the allocation to alternatives had also fallen from 30% to 25%. GIC had also halved its allocation to cash (from 8% to 4%).

The report also mentions senior staff appointments that took effect on July 1. Lim Kee Chong, Goh Kok Huat and Tay Lim Hock became deputy presidents of the public markets, real estate and special investments groups, respectively. Chia Tai Tee assumed the appointment of deputy chief risk officer.