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BOTH sovereign wealth fund GIC and state investor Temasek Holdings are key contributors to Singapore’s net investment returns, which is why their results are so closely scrutinised every year.

GIC’s numbers, which were released on Wednesday (Jul 24), show that its annualised real rate of return for the 20 years ended Mar 31, 2024, came in at 3.9 per cent. As it takes a long-term view of the reserves and needs to account for the effects of inflation, this 20-year real rate of return is the main performance metric.

Temasek’s numbers were announced earlier in July. Its portfolio delivered a total shareholder return of 7 per cent for the same 20-year period while Singapore’s core inflation was 1.9 per cent. 

These positive numbers are welcome, but the more important challenge is that these returns have to be sustainable.   

It’s getting tougher in the current investment climate, what with increased geopolitical risks, a slower growth environment for the emerging economies, and an ageing demographic.

Any threat of inflation remaining elevated for longer than expected becomes a significant challenge, especially for GIC which focuses on the real rate of return.

In its latest report, it saw inflation remaining structurally higher for reasons such as the Covid-19 pandemic, which reinforces the emphasis on supply chain resilience, which leads to increased costs. 

Another factor is the transition to a net-zero economy, which requires investments. The physical risk to infrastructure and assets from adverse weather conditions could also place more costs on the global economy. 

What actions can they take?  

Looking at both investors, the talk has increasingly shifted from one of tailwinds propelling economies and businesses forward to a focus on headwinds. 

The environment is unlike two decades ago, when the “whole world (was) moving in unison” and growing, said Temasek’s deputy chief executive officer Chia Song Hwee.

“Those days are over. We need to work a lot harder, a lot more bottoms-up in order for us to generate returns,” he said when the results were released on Jul 9.

For Temasek, the US continues to be the largest destination for its capital, although India and Japan are also firmly on the radar. Going forward, Temasek will focus on investing in artificial intelligence (AI) enablers and adopters, as well as businesses benefiting from US industrial policies.

It has had to be an active shareholder to engage its Singapore-listed companies on strategies and support initiatives – such as the restructuring of Sembcorp Marine – that lead to long-term shareholder value.

Price discipline, granular approach

In its annual report, GIC highlighted price discipline as a core part of its investment approach.

It feels that certain markets have yet to price in the level of uncertainty investors face. Here is where price discipline is important, to carefully weigh the risk-reward prospects of all potential investments to ensure adequate compensation for assuming the risks.

GIC even signalled a note of caution over investing in AI businesses, especially the early-stage ones. They are commanding very high valuations which GIC said is justified only if they are eventual winners, and that is something not easy to predict.  

However, hardware makers, including semiconductor firms and the infrastructure layer businesses such as cloud platforms, have less downside, added GIC. 

Hence, each investment requires careful assessment of its potential risk return trade-offs.

Effective diversification is one way of protecting the portfolio during these uncertain times. 

So for example, within real estate, GIC has identified different sub-sectors – including data centres, student housing, and logistics – and different geographies. With these investments, the portfolio could better weather the recent sharp rise in interest rates as well as the weak performance in US commercial real estate.

Under a total portfolio approach, GIC is diversifying towards investing in more real estate and infrastructure as they have resilient cash flows backed by inflation-linked revenue contracts. 

It has also moved into commodities and commodity-related equities, to increase allocation to liquid return streams that offer inflation protection. 

The sovereign wealth fund has raised the bar for its new investments in private markets. This is to ensure that the investment returns generated will be high enough to compensate for the increased risks. 

Partnerships and local insights 

Perhaps most crucially, GIC and Temasek started very early to establish a significant international presence overseas. 

GIC set up its first global office in New York 40 years ago. It is now in nine other cities including Tokyo, London, Mumbai and Sao Paulo. The New York office is the largest outside Singapore with a 250-strong team. The Sao Paulo office has established GIC as one of the largest and most active institutional investors in Latin America.

Temasek has 13 offices in nine countries around the world. Apart from Singapore, there is also Beijing, Mumbai, Brussels, Paris, Washington DC and Mexico City. 

Having such extensive networks keeps the investors on top of investing trends, gives them deeper insights while helping to build relationships with investment players as well as investee companies. 

There are many challenges in shaping a portfolio that can preserve and enhance the long-term international purchasing power of the reserves – GIC’s remit – and for Temasek to deliver long-term sustainable returns, but stakeholders should rest assured that these are being addressed.