Cashed-up GIC looks to take calculated risks

Singapore sovereign fund GIC has raised its cash holdings over the past year and says it will look to take calculated investment risks in what it sees as a challenging medium-term environment.

This could mean increased allocation to alternatives, including private equity and real estate, which has been a growing focus for the Government Investment Corporation, investment manager for the city-state’s foreign reserves.

In the year to March 31, GIC increased its cash allocation to 11%, from 3% a year ago, saying it allowed investment income to accumulate because of heightened global market uncertainty.

Its exposure to equities fell from 49% to 45% over the period, with the drop entirely accounted for by developed market holdings, which now stand at 30%. Its exposure to emerging markets remained at 15%.

AUM numbers are absent from the state fund’s newly released annual report. Publicly it states only that it manages in excess of $100 billion. According to AsianInvestor’s annual rankings of Asian institutional investors by assets, GIC saw an 11% year-on-year decline in AUM to $220 billion as at July 2011 (the latest figure we were able to source).

Further, over the past 12 months, GIC has cut its allocation to bonds to 17% as at March 31 (from 22% a year ago) on account of yields having been pushed down by the flight to safety and central bank intervention.

But it has marginally increased its alternatives allocation to 27% (from 26%), of which private equity and infrastructure accounts for 11%, real estate for 10% and absolute return strategies and natural resources for 3% apiece.

Under the private equity section in its annual report, GIC says it has now built up a network of 100 active private equity fund managers.

In geographic terms the distribution of its assets remained largely unchanged, although Asia has overtaken Europe in the past year. 

Its heaviest exposure is to the Americas at 42% (unchanged from a year ago), followed by Asia at 29% (up from 26%), Europe at 26% (down from 29%) and Australasia with 3% (unchanged).

Within Asia it has 13% exposed to North Asia, 12% to Japan and 4% to others; within Europe it says its exposure to PIIGS stood at 1.4% as at March 31, mostly in real estate and equities in Italy and Spain.

In terms of investment performance, GIC’s government portfolio has achieved annualised nominal rates of return in US dollar terms of 3.4% over the past five years, 7.6% over 10 years and 6.8% over 20 years. It notes that positive returns from bonds and real estate investments offset negative returns from emerging markets and natural resource equities.

In its annual report, GIC notes this portfolio’s five- and 10-year returns outperformed its 60:40 and 70:30 (global equities:global bonds) portfolios, but lagged them over 20 years because for the first decade the government's portfolio was more conservatively invested and its diversification into alternatives has only taken place during the past 10 years.

Group CIO Ng Kok Song describes the medium-term outlook as challenging, with the risk of further disruptive events in Europe, a fragile US recovery and slowing global economic growth including in emerging markets, most notably China.

Also in its annual report, the sovereign fund outlines its approach to selecting external managers, which it notes manage up to 20% of the government’s portfolio.

GIC says it evaluates their track record; performance relative to peers; compatibility with GIC’s existing portfolio; and assessment of a manager’s team, investment process and attention to risk control.

It also goes through operational due diligence before awarding an investment mandate, examining a manager’s investment structure and internal controls in operations and pricing procedures, amongst other things.

Overall, 58% of GIC’s external managers are based in North America, 22% in Europe, 11% in Singapore and 9% in Australia.

By asset class, 54% of GIC's externally managed strategies are in marketable alternatives, 36% in equities and 10% in fixed income and FX. The majority of its external mandates are 3-6 years.