Temasek defends China holdings amid big losses

Singapore state fund Temasek – now the biggest investor in Chinese banks, according to Standard & Poor’s – has defended those holdings, despite their solid contribution to its worst annual return since the 2008 financial crisis.

Meanwhile, the company plans to further boost its exposure to technology stocks, and is setting up a San Francisco office as part of a continued reshaping of its portfolio.

After Temasek’s investment team was praised for expanding its international footprint in 2015, its portfolio has been hit by extreme global market volatility in the second half of 2015 and early 2016, particularly in China.

In the financial year to March 31, 2015, Temasek reported a 19% return for shareholders but in the following 12 months the return fell to -9%. The reversal is the $179 billion fund’s worst result since the global financial crisis.

The dramatic change of fortune has been attributed to losses from its domestic holdings and listed Chinese investments. Combined, those two elements make up 66% of the listed investment portfolio (Singapore is 40% and China 26%).

While relative performance for its Singapore and Chinese holdings was positive – the respective benchmark returns were -15% and -26% – the overall negative return has plunged Temasek’s long-term return to a record low. The 20-year annualised return now stands at 6%, having averaged 15% between 2010 and 2014.

Analysis by rating agency Standard & Poor’s showed that of the 20 biggest foreign institutional investors in Chinese bank stocks, Temasek stood out, boosting its positions by 58% in the year to the end of May 2016 to overtake fund house BlackRock as the top investor in Chinese banks. Moreover, Temasek accounted for 28% of Chinese bank stakes held by the 20 biggest investors over the same period, according to S&P.

While the company would not disclose exact numbers, it did confirm that it has reduced its stake in China Construction Bank while increasing holdings in Industrial & Commercial Bank of China and making some initial investments in Postal Savings Bank of China.

In the 2015/16 financial year, Temasek continued to expand into non-banking sub-sectors, including an investment in PayPal, as well as smaller but fast-growing technology-enabled companies such as SoFi and C2FO in the US, Funding Circle in the UK and BillDesk and Policy Bazaar in India. In the investment brokerage space, the firm invested about $257 million in Citic Securities.

Temasek’s investment heads said they recognised that the company needed to reduce its China bias. In its annual briefing held in Singapore, senior managing director Png Chin Yee defended the high level of mainland exposure: “There are challenges, but over the long term we still think that China offers significant growth potential. Our exposure is mainly to the leading banks in the sector, with very liquid and defensible balance sheets.”

There were echoes of similar comments three years ago, when the fund was also seen defending its exposure to Chinese banks.

Meanwhile, Chia Song Hwee, joint head of investment at Temasek, reaffirmed the firm’s commitment to finding new sources of return. “The world is changing,” he said. “Where we used to make returns, we can’t be sure we’ll continue to do that. We have been actively reshaping our portfolio in the last five years."

In particular, its allocation to “focus sectors” (tech, insurance/payments/fintech, life sciences, consumer, energy and resources) rose to 23% of the equity portion from 8% between 2011 and 2016. In dollar terms, the allocation rose from $15 billion to $56 billion. That is a big change, said Chia, adding it would take “a while for the full effect to be felt”.

Dilhan Pillay, the co-head of investment said Temasek would continue to raise its TMT exposure. The firm plans to open an investment office in San Francisco in September in an indication of its intention to focus on Silicon Valley as a source of new investment ideas.

Temasek’s management structure changes, announced in April this year, were not without controversy and there remains a widespread feeling it should go further, as reported. In particular, there have been calls for Ho Ching – Temasek’s chief executive and the wife of Singapore’s prime minister, Lee Hsien Loong – to step down, especially after she took an extended sabbatical in 2015.