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Singapore’s big two alter course

In this age of Twitter and cacophonous markets, long-term investing requires great patience. These days, major market events occur more often and have more significant consequences than previously, making it necessary to revisit investment theories and strategies regularly.

Indeed, Singapore’s state-owned investment firm Temasek Holdings has revised its strategy twice in the last five years. Temasek, whose sole shareholder is Singapore’s Ministry of Finance, was established in 1974 with S$354 million and a portfolio of fledgling Singapore companies that the state had invested in. Many delivered substantial returns in a young and growing domestic market of the early years, sometimes protected as monopolies.

In recent years, Temasek decided to diversify away from a Singapore-focused portfolio and aimed for one-third exposure to Singapore, one-third to the rest of Asia and one-third to the OECD economies. It made bold strides into the marketplace in pursuit of that strategy. The year ended March 31, 2008 was the year when Temasek’s net investments outside Asia exceeded net investments into Asia for the first time. A substantial part of these investments were in financial services. Temasek saw the sector as “a broad-based proxy for economic growth, though this sector will also be broadly affected by downturns.”

In December 2007, the firm invested US$4.9 billion in Merrill Lynch and a further US$3.4 billion in July 2008. Other global financial-services investments included ₤975 million into Barclays PLC and an increased stake in Standard Chartered Bank to 19%. Regional investments in the sector included 63% of NIB Bank, 58% of PT Bank Danamon Indonesia and 28% of Singapore’s DBS Group Holdings. In March 2008, financial services represented 40% of Temasek’s S$185 billion portfolio.

But then things started to go wrong. Merrill Lynch teetered on the brink of collapse and was sold to Bank of America, at which point Temasek sold off the converted BoA shares, reportedly at a loss of between US$2 billion and $4 billion.

As Barclays’ future looked similarly wobbly, Temasek sold its entire stake, reportedly at an estimated loss of ₤500 million to ₤600 million. The sources of the sale details were anonymous, and Goh Yong Siang, Temasek’s senior managing director of international and strategic relations, reportedly said “a number of such reports are inaccurate and misleading. It is not Temasek’s policy to respond to them.”

Temasek’s chairman, S Dhanabalan, said in a statement in the Temasek Review 2008: “For the last two years, we have been concerned over the prospects of a major correction, but did not anticipate the speed and depth of the dislocation. A total of US$400 billion was written off by banks around the world in the space of one year since June 2007. Its epicenter in the capital of global finance, New York, also surprised us.”

The dislocation appears to have affected Temasek’s returns over the shorter term. Total shareholder returns (TSR) by market value grew by 18% in the 34 years since inception to March 31, 2008. TSR by market value in the five years to March 2008 was 23%, but TSR have since weakened: In the three-year period, TSR grew 19%; in two years, 16%; and over one year, 7%.

While shorter-term gains and losses are immaterial to a long-term investor, it was clear that fundamental changes were transforming the world’s economies and Temasek’s strategy needed a review.

In February 2009, Temasek’s CEO Ho Ching explained, “Over the last two years, even before the crisis, we have been looking at this posture [the previous aim of one-third allocation each to Singapore, Asia outside Singapore and OECD] and asking ourselves as Asia evolves, should we emphasise more in Asia, should we emphasise more in OECD, or should we also open an avenue to other economies. As you know, we have just this year opened offices in Brazil as well as Mexico. This is very much  part of the evolution of thinking of how we should position ourselves internationally, globally and so this part of the review is really trying to pull together against the backdrop of the macro changes, what we think are the long-term trends and then try to position Temasek in the light of that.”

The current strategy is described by Alan Thompson, Temasek’s managing director of investment (Latin America), as “a bit like a football team formation”: 10:20:30:40. That is, a 40% allocation to Asia outside Singapore; 30% to Singapore; reducing OECD allocation to 20%; and increasing investments in Latin America, Russia and Africa to 10%.

“This is not a rigid target, but a re-weighing of the growth trends and the changing risks over the next decade or two, particularly for Asia. It also framed our decision to open new offices in Mexico and Brazil…. Since then, we have made several investments in private equity funds, the oil and gas sector and in commercial real estate… it is no secret that emerging markets have the greatest opportunity for long-term sustainable growth. And, within those markets, natural resources, manufacturing, real estate, agriculture, particularly in Brazil, hold great promise for the future,” Thompson said in June.

Little has been said, however, about sector allocations. But recent developments indicate greater attention to commodities. Although it has transpired that former BHP Billiton chief Charles Goodyear will no longer replace Ho as CEO, observers said his appointment earlier in the year signaled a shift in Temasek’s focus away from financial services and developed markets, to natural resources and emerging markets such as Africa and South America.

Energy and resources had declined from 6% of Temasek’s portfolio in 2007 to 5% in 2008. In mid 2008, Temasek made the first moves to diversify into commodities by incorporating a wholly owned unit, Orchard Energy, reportedly to invest in the upstream energy sector. In June, Temasek took a 13.8% stake in Olam International, a Singapore-based firm managing the supply chain of agricultural products and food ingredients in a farm-to-factory integrated model. Olam was a Temasek portfolio company until it was sold in 2006.

Meanwhile, Singapore’s sovereign wealth fund, the Government of Singapore Investment Corporation (GIC), is also making adjustments to match the markets’ new complexities. In mid June, GIC announced a new position, the group president, to oversee all three GIC subsidiaries: GIC Asset Management which invests in public markets; GIC Real Estate which invests in real estate; and GIC Special Investments which invests in infrastructure and private equity assets. Each of the three units has its own president and board of directors.

The new role of group president will give GIC a more coordinated approach to investing in the various asset classes, explained Dr Tony Tan, GIC’s deputy chairman and executive director. “The changing economic and financial landscape requires GIC to be agile and responsive to new challenges and opportunities. The management changes will enable GIC to operate more effectively on an integrated basis, while extracting maximum value from the special characteristics and specializations of the individual asset classes,” said Tan, who also serves as chairman of GIC Special Investments and from July 1, as chairman of GIC Real Estate. Lim Siong Guan is the new group president and is concurrently chairman of GIC Asset Management.

Although a long-term investor’s effectiveness cannot be judged merely by two recent investments, the Singapore public has not seen it that way. GIC has borne the brunt of public anger at investments into two weakened financial institutions, UBS and Citigroup. GIC invested US$6.88 billion into Citigroup’s convertible preferred notes in early 2008, which were converted into common stock in February 2009. The CHF 11-billion UBS investment was made in December 2007.

Singapore’s Senior Minister Lee Kuan Yew, who is also chairman of GIC, remarked that GIC had bought into Citigroup and UBS “too early”. Ensuing public concern in Singapore led to Tharman Shanmugaratnam, the finance minister, clarifying to parliament that GIC’s portfolio had declined 25% from the markets’ peak in October 2007 to end 2008. During this period, the MSCI World Index fell 46% and Harvard’s endowment fund slid about 30%.

Tharman said GIC will continue investing in various asset classes, including riskier assets such as equities and real estate with a long-term view. GIC has an investment horizon of about 20 years and aims to achieve “a reasonable rate of return above global inflation, with due regard to risks”.  

According to GIC’s latest annual report for the year 2007/08, annualized return is 5.8% in the 20 years to March 2008 in Singapore-dollar terms. Average annual return in the 25 years to March 2006 was 9.5% in US dollar terms and 8.2% in Singapore dollar terms. Average annual returns over global inflation during this period was 5.3%.

About 44% of the portfolio was invested in public equities (34% in developed markets and 10% in emerging markets). Fixed income was the second-largest asset class at 26%, followed by alternatives at 23%. Of the alternative assets, real estate took the largest portion, at 10%. Natural resources, at 2%, was the smallest. Cash and “others” constituted 7%.

The portfolio was most heavily weighted in the US, at 34%. Other markets in the Americas made 6%. Europe also played a significant role, with 35% and Asia was allocated 23%, with 11% going to Japan and 4% to China/Hong Kong.

GIC was incorporated in 1981 and its funding sources are the Singapore government’s balance of payments surpluses and national savings. The portfolio started in 1981 with primarily fixed-income assets. Over the last 25 years, this asset class has played a decreasing role, from three quarters to about a quarter of the portfolio in the 2007/08 financial year.

At this time, it is unclear whether the creation of a new role overseeing the investment of all asset classes will change GIC’s investment thesis, strategies and asset allocations.

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