GIC sees challenges for value investing

May 10, 2017

The sovereign wealth fund was among those taking part in the Asian Investment Summit, as panelists discussed screening for liquidity against different investment horizons.

Short-term liquidity management is becoming increasingly important to long-term investing, delegates heard at the Asian Investment Summit on Wednesday, on the second day of AsianInvestor Week in Hong Kong.

Among those banging that drum was panel speaker Prakash Kannan, head of total portfolio management, economics and investment strategy at GIC, the $100 billion-plus sovereign wealth fund of Singapore, who described the volatile market environment as “quite challenging” for value investors.

GIC attaches great importance to the fundamental quality of the assets it invests in, even though strategic asset allocations still play the key role over longer investment horizons and sovereign wealth funds have the capacity to look through cycles.

“For every stock and single name we bought, [we asked] if it is something that can weather a liquidity crisis,” Kannan said. "That's because if an investment setback has the potential to permanently harm a portfolio, then it could “really change the dynamics."

As more and more institutional investors up their exposure to alternative assets such as private equity funds, which make capital calls at certain times, the issue of effective liquidity management becomes increasingly important for the industry, noted another panellist, Garry Hawker, partner and director of strategic research, growth markets at Mercer.

So having the right governance with the right liquidity management system is an important element to alternatives investing, he added.

Horizons

In general, it is important to differentiate between investment horizons.

In his opening presentation at the summit, Jim McDonald, chief investment strategist of Northern Trust, identified two distinct perspectives: a strategic outlook, normally out to five years, and a tactical outlook covering 12 months.

Hawker concurred, noting how an investor’s tolerance for things going wrong in the short term is often determined by their investment horizon. For example, sometimes insurers are forced to sell assets at the wrong time in order to meet solvency requirements, he said.

Managing the risks is often a fluid task with imperfect results.

Using models and historical data, we can make assumptions about what might happen. “[We] are not trying to get one answer, but just to have multi[ple] scenarios,” Matthew van der Weide, vice president, portfolio and quantitative analytics, FactSet, said at the same panel.

But even then that only deals with the known unknowns.

Given the changing macroeconomic environment, Kannan said it was tough to have an investment outlook covering the next five to 10 years.

One possible scenario is that the current low-return environment will continue, in which case GIC will look to build up liquidity on the “margin” of its portfolio, he said.