Seek out real assets, sustainability for returns, says GIC chief

Budding asset owners need to look further afield from traditional equities and bonds and seek out bottom-up opportunities in areas such as real assets if they are to have a chance of enjoying decent returns in today's generally low rate environment, warned the head of GIC. 

Lim Chow Kiat, GIC

Liam Chow Kiat, chief executive of the Singaporean sovereign wealth fund, believes that today's 1% to 2% projected returns are equivalent to 6% to 8% of a few decades ago, meaning asset owners need to diversify their portfolios and potentially take more risk to enjoy even a mid single-digit rate of investment return. 

“You have to go below the [traditional] asset class level to find assets which have better risk-reward characteristics," he told the audience of the 2021 Imas-Bloomberg Investment Conference on Tuesday (March 9). "This is harder to do, but if you have the resources, it’s a good way to deploy.”

The chief executive of the sovereign wealth fund, which has an estimated $488 billion in assets under management according to Global SWF, stressed the importance of spreading risk in the current environment. “There is a lot of value in diversifying, especially in a world that is more and more uncertain,” he said.

Lim noted that real assets, typically defined as real estate, infrastructure and commodity assets, are one particularly important means of diversifying from low yielding fixed income while also hedging against inflation risk because their value typically moves in line with price changes.

“Diversifying across asset class and geography is a good way to approach the market,” he noted.

GIC has also been spending more time on considering how best to incorporate sustainability into its investing approach, in a similar manner to other asset owners globally.

“That [greater] emphasis on sustainability opens up the opportunity set for us," said Lim, noting that the fund is particularly focusing on the transition to renewable energy. “That’s an area in which we’re spending a lot of time trying to understand where the opportunity could be.”

He cited the example of GIC’s $2 billion investment in Duke Energy in January this year. The energy proceeds from this transaction would allow the energy company to advance a $60 billion clean energy transition plan, in line with its aim to cut carbon emissions by half by 2030.

NAVIGATING BOND VOLATILITY

One additional wrinkle that major asset owners are increasingly having to countenance is the inherent volatility in fixed income and equity markets as major economies begin to return to normal and the prospect of inflation leads to potential interest rate increases. These concerns have helped cause a rapid increase in bond yields in recent weeks.

When asked about this, Lim said bond investors are right to be concerned about large the US's $1.9 trillion Covid-linked fiscal stimulus plan and its ability to cause an overheating in the form of CPI (consumer price index) inflation, asset inflation or excessive credit growth.

However, he highlighted that bond yields still remain at historically low levels. “The [current] level of bond yields is actually not that high to cause a big problem for valuations. What one has to be concerned about is whether it will move further upwards.”

While acknowledging there is pressure for rates to go higher, Lim said it was difficult to pin down a timeframe and declined to share his own projections.

While Lim concentrated his comments on mainstream markets, GIC has become increasingly well known for its assertiveness inmaking direct and co-investments. The latest research on sovereign wealth funds by Spain’s IE University and Icex-Invest, released on March 3, placed it as the world’s second most active state investor between July 2019 and September 2020, beaten only fellow Singaporean state investor Temasek.

With 46 and 60 investments, the two funds collectively represent 65% of all deals by sovereign wealth funds globally during this period.

The report also highlighted GIC’s prominence in venture capital investing and as one of the most active industrial real estate investors. Other sectors in which GIC has been active include software, fintech, and pharmaceuticals.

GIC also accounted for the biggest share deals over $1 billion reported during this period, with its participation in the Adnoc Gas Pipeline consortium, a $20 billion global energy infrastructure platform, topping the list of largest transactions by sovereign wealth funds.