Singapore’s GIC sees tough decade ahead

04 August 2014   Category: News, Asia, Global, Singapore   By Daniel Shane

Government of Singapore Investment Corporation (GIC), the sovereign wealth fund (SWF) estimated to manage around US$320 billion in assets, has warned of a tougher investment climate over the next decade as central banks scale back on easy money and cease unconventional monetary policy measures.

In its latest annual statement, the GIC said that its annualised 20-year real rate of return for the year ended 31 March 2014 was 4.1%. In US dollar nominal terms, the fund achieved annualised returns of 12.4%, 7.0% and 6.5% over time periods of five years, ten years and 20 years, respectively.

The GIC said that it was seeking more investment opportunities in emerging markets, citing strong asset price rises in developed markets, which the GIC said were not matched by comparable economic and earnings growth.

“Asset prices have risen strongly but the outlook for economic growth and earnings have not, thus far, improved as much. An example would be US equities which have done very well, but for which underlying earnings growth has only been modest,” wrote Lim Siong Guan, group president, and Lim Chow Kiat, group chief investment officer, in a foreword accompanying the annual report.

The two added that as monetary policy normalises in developed markets, financial assets will likely see diminished returns. The US Federal Reserve is expected to conclude the winding down of quantitative easing measures by the end of this year, followed by a possible interest rate rise mid-2015. Reports have said that the Bank of England could also hike its rate early next year amid sustained recovery in the British economy.

“The current high prices in financial markets portend weaker future returns, including possibly negative returns at some point. The investment environment for the next ten years will therefore be more challenging for global investors, including GIC,” Mr. Lim and Mr. Lim continued.

The GIC’s latest asset allocations reflected this preference for emerging market investments: developed market equities accounted for 29%, down from 36% one year ago; while emerging market equities were 19%, up from 17%. Elsewhere, the GIC increased its allocation to nominal bonds and cash from 29% to 31%; inflation-linked bonds from 2% to 5%; and private equity from 8% to 9%. Real estate, another alternative asset class that the GIC has invested in heavily in the past, saw its allocation fall from 8% last year to 7% in 2014.

Allocations based on geography were not markedly different compared to 2013. Investments into US assets decreased from 36% last year to 34% in 2014; those in the Eurozone rose from 11% to 14%; while those into North Asia (China, Hong Kong, Korea and Taiwan), increased from 13% to 14%.

The GIC is believed to be the world’s eighth largest SWF by assets, according to the SWF Institute, holding about $320 billion. It was established in 1981 to invest the South East Asian city state’s foreign exchange reserves, and allocates the majority of its assets outside of Singapore.

Some of its more prominent recent transactions have been in real estate and private equity. In November last year, Singapore’s GIC teamed up with the United Arab Emirates’ Abu Dhabi Investment Authority to jointly invest $600 million in Time Warner’s New York headquarters as part of a $1.1 billion deal.

A month later, GIC paid $2.89 billion for a 50% stake in the City of London’s Broadgate office development.

Other recent transactions included an undisclosed amount invested in India’s largest ecommerce company, Flipkart, which has so far raised $1 billion from investors. GIC also this year invested $170 million into Netshoes, a Brazil-based online sports retailer.