GIC Pte Ltd. sees value in emerging markets after their recent share price declines, says Chief Economist Leslie Teo. The MSCI Asia-Pacific index has gained just about 1.5% this year, lagging a 16% surge in the S&P 500 as investors pulled funds out of Asia into the US market. The iShares MSCI Emerging Markets ETF has fallen by more than 10% since the start of the year because of weaker economic growth prospects and expectations for an unwinding in the US Federal Reserve’s stimulus. The Institute of International Finance in June cut its forecast for private capital flows to emerging markets to $1.112trn in 2014, the lowest since 2009, from an estimated $1.145trn this year.
“We hold on to the belief that emerging market consumers will continue to provide an important source of investment returns for the medium to long term,” says Teo. “Quite a lot of emerging market assets have corrected in terms of their prices over the last three years, so some value has emerged in that space.”
GIC’s portfolio is 46% invested in public equities, of which 15% is in emerging markets and the rest in developed markets. It didn’t provide a geographical breakdown of its alternative investments and fixed income, which currently stand at 21% and 26% respectively. Its so-called Policy Portfolio focuses on six core asset classes and these are developed market equities, emerging market equities, nominal bonds and cash, inflation-linked bonds, private equity and real estate. GIC kept its allocation for North Asian markets, comprising China, Hong Kong, South Korea and Taiwan, unchanged at 13% as of March this year.
China’s GDP rose 7.5% in the second quarter from a year earlier but growth was down from 7.7% in the previous period. The Chinese government has taken measures to help sustain growth, including plans to ease rules on foreign direct investments. Meanwhile, the country’s stock index has fallen 40% from its August 2009 high.
GIC has stakes in at least 40 listed Chinese companies, including China Pacific Insurance Group and Beijing Capital International Airport, according to Bloomberg data. In Brazil, the company was reportedly to be planning to open a Sao Paulo office next year. GIC and Singapore-based Global Logistic Properties have invested about $1.4bn in Brazilian warehouses.
Turning to Europe, Teo says the “euro-zone has moved from an acute crisis phase to a chronic crisis phase.” While GIC holds modest expectations of growth for Europe, the sovereign wealth fund sees long-term “bottom up investment opportunities,” he adds.
“We have a very modest expectation on growth for Europe,” says Teo. “The challenges of deleveraging and regaining competitiveness will likely weigh on the weaker euro-zone economies for several more years.”
However, the company sees long-term “bottom up investment opportunities,” says Teo, citing GIC’s acquisition of a 35% stake in TIGF (Transport et Infrastructures Gaz France), Total SA’s gas transport and storage business. The other partners in the €2.4bn ($3.2bn) deal are Electricite de France with a 20% stake and Snam, the Italian gas transport and storage operator, with a 45% interest.
“While the macroeconomic picture is challenging, Europe has many assets and businesses which are competitive globally,” says Teo. As of March this year, the company’s portfolio is 25% invested in Europe, including 8% in the UK and 11% in the euro-zone. Its European allocation a year ago was 26%.
Recently, the state investor announced a revision of its investment strategy to allow the company to be more responsive to a volatile investment environment following the 2008 global financial crisis.
It has set up a “Reference Portfolio, comprising 65% global equities and 35% global bonds. This passive portfolio reflects the Singapore Government’s mandate for GIC, which is to provide a sustainable real rate of return over the long term while not taking on excessive risk. Its investment holdings have been reorganised into two actively-managed portfolios – the Policy Portfolio and the Active Portfolio.
The ‘Policy Portfolio,’ which has been simplified to six core asset classes from 13, aims to achieve superior returns over the long horizon. The ‘Active Portfolio’ seeks to outperform the Policy Portfolio. It will reflect GIC’s skill-based strategies adopted by the management within risk limits set by the board, the company stated.
The new investment framework aims to provide added clarity and focus in its investment strategies by clearly defining the different risk and return drivers for the Singapore wealth fund over the long term, based on its fiscal 2012-2013 review.
Teo says the “Active Portfolio is funded by the sale of assets in the Policy Portfolio and must therefore do better than this cost of capital plus additional premia for the risk taken.”
He explains “infrastructure, for example, could be funded by a combination of the sale of real estate, bonds and equities; credit would be funded by the sale of a combination of equities and bonds. GIC’s management will allocate a Board-defined risk budget among various active strategies.”
GIC’s portfolios posted a 20-year annualised real rate of return of 4% for the year ended 31 March, compared with 3.9% in the previous fiscal year. Geographically, the company has an allocation of 44% in the Americas (42% a year ago) and 28% in Asia (29% a year ago). Its Australasia’s investment remained steady at 3%. Cash holdings stood at 7%.
The GIC portfolio in the fiscal year 2012-2013 had annualised nominal rates of return in USD terms of 2.6% over five years, 8.8% over 10 years and 6.5% over 20 years.