Singapore’s GIC reported an annualised rolling 20-year real rate of return of 4.2% for the period ending March 31, 2022, down marginally from the 4.3% posted the year before, according to annual results released yesterday (July 27).
The rolling 20-year real rate of return is the primary metric for evaluating GIC’s investment performance as the sovereign wealth fund does not disclose single-year returns in line with its mandate to manage its assets over the long term.
Over the 20-, 10- and five-year periods, the GIC portfolio returned 7%, 6.4%, and 7.7% in nominal US dollar terms, respectively, in line with the broader markets.
“The 20-year real return has decreased (4.3% to 4.2%), which by definition means that FY22 real return was lower than that of FY01 (6.0%),” said Diego Lopez, managing director of Global SWF to AsianInvestor.
“Similarly, the five-year nominal return has decreased (8.8% to 7.7%), which means that FY22 nominal return was significantly lower than that of FY17. According to our estimates, GIC’s real rate of return may have been negative in fiscal year 2021/22,” he said.
Lopez explained that according to Global SWF’s estimates, GIC’s FY17 real return was negative. Hence, he concluded that the FY22 real return would be too, given the drop in the five-year rolling return.
“This estimate is supported by the significant liquidity of the fund (73%), the performance of global bonds and stocks in the last three months of the fiscal year, and significant inflation,” he added.
CHOPPY WEATHER AHEAD
GIC’s chief executive Lim Chow Kiat said in a letter accompanying the results that the wealth fund’s diversified portfolio and cautious investment stance had helped to cushion its performance from the market correction in early 2022.
“This posture was held throughout FY2021/22, given elevated asset valuations and uncertainty arising from potential inflationary pressures,” he said.
However, he noted that the investment landscape is shifting rapidly as concerns over deflation have turned into worries of elevated inflation, forcing economic policymakers to reverse stimulus policies.
“At the same time, the clock for the climate crisis is ticking, pandemic risk lingers on, and geopolitical conflicts and domestic political schisms are growing,” he said, adding that GIC will continue to adapt to these challenges while remaining firm to its mandate, values, and investment principles.
Other sovereign wealth funds that have reported their latest fiscal year’s annual investment return include Japan's GPIF (5.41%) and Norway’s NBIM (14.5%).
During the year in review, GIC reduced its allocation of public equities to 30% from 32% the year before and lowered the share of bonds and fixed income in its portfolio from 45% to 43%.
Consequently, it has raised its stake in real estate to 10% in the year under review from 8% previously and increased its allocation of private equity to 17% from 15% previously.
Lopez said GIC has a fairly liquid portfolio - 73% in bonds and stocks - when compared to other sovereign investors of similar mission and risk profile.
The rise in allocation to private markets is "partly due to allocation changes, and partly due to the drop in bond and stock prices during the first quarter of 2022.”
Similarly, the increased allocation to the US was due more to currency effects, rather than a change in policies, he said.
Geographically, the fund has reduced its exposure to Asia (ex-Japan) from 26% to 25% and Japan from 8% to 7%, while raising its exposure to the US from 34% to 37%.
Javier Capapé, director of sovereign wealth research at the Center for the Governance of Change at IE University, praised GIC for its ability to plan ahead.
He told AsianInvestor that the fund had, since March 2022, acquired two student housing portfolios in the UK, a US-based transport company, an office-led, mixed-used development in Paddington, central London, and a fashion tech platform in India, according to announcements on the company's website.
"This speaks volumes about GIC's strategy in geographic diversification and the specialisation in inflation-protected real assets," he said, adding that the fund had also made prior investments in industrial estates and data centres as well as startups in fintech, cloud, analytics and cleantech in various countries.
"Long-term vision and investment thesis, private markets expertise and capabilities, liquidity, paired with a truly global geographic approach make GIC a ready institution to face these turbulent times," he said.
Asset mix of the GIC portfolio
GIC also announced the setting up of a new Sustainability Office, which aims to conduct research into key sustainability issues and drive their integration into the firm’s investment processes.
The new initiative is expected to complement the Sustainable Investment Fund (SIF) formed in 2020 to identify sustainability-related opportunities across all asset classes that have the potential to generate good returns.
Under this scheme, GIC’s private equity department has established Electron Innoport, a global portfolio of funds that invests in early-stage energy transition opportunities such as EV (electric vehicle) charging stations, a direct air capture company, and a company that uses anaerobic digester processing to provide food waste solutions.
GIC has also made fixed income investments in an electric refuse truck manufacturing company while its infrastructure department has identified potential opportunities in disruptive megatrends such as long duration energy storage, hydrogen economy, fusion energy and carbon capture sequestration.