Singapore’s GIC Pte Ltd’s top executive is warning that inflationary headwinds risk unwinding the sovereign wealth fund’s gains over the last 40 years, and that portfolio diversification will be more challenging as central banks hike interest rates to battle rising consumer prices.
Chief Executive Officer Lim Chow Kiat points out that high inflation not only eats into real returns but has an adverse impact on economic stability, which raises the risk premia on financial assets. He says few asset classes are spared in such an environment.
“While the increase in inflation caused by pandemic-induced supply disruptions and a strong recovery in demand should eventually fade, the reversal of the longer-term drivers of disinflation is concerning,” Lim writes in GIC’s annual report published recently.
GIC was born in 1981, when US inflation approached 10% and long-term interest rates were at 14%.
Lim notes that there was a secular decline in inflation and interest rates over the next four decades. That period may be coming to an end.
“Disinflationary tailwinds may be turning into inflationary headwinds,” he says. “Such a development would reverse the gains made in GIC’s first 40 years.”
According to Lim, GIC has “doubled down” on its core investment principles of portfolio diversification and taking a long view, and that it is “ready to pivot as new challenges and opportunities arise”.
GIC recorded an annualised 20-year real return of 4.2% for its financial year ended March 31, down slightly from 4.3% a year ago.
The wealth fund doesn’t publicly disclose the value of its assets, the biggest share of which – 37% – was invested in nominal bonds and cash in the last financial year. Of the balance, 17% was in private equity, 16% in emerging-market equities, 14% in developed-market equities, 10% in real estate, and 6% in inflation-linked bonds.
The shares are roughly the same as in the year ended March 2021.
Some 37% of the assets were invested in the US, 25% in Asia ex-Japan, 8% in the eurozone, 7% in Japan, 4% each in Latin America and the UK, and 5% in the Middle East, Africa, and the rest of Europe. Another 10% is categorised as ‘global’.
The Sovereign Wealth Fund Institute estimates GIC had around US$690 billion of assets as of March 2022.