Last week, Temasek published its annual Temasek Review 2018 results, reporting a record net portfolio value of S$308 billion, the first time its net portfolio value has exceeded S$300 billion. For comparison purpose, DBS market capitalisation is about S$55 billion while SingTel market capitalisation is about S$53 billion.
Temasek also reported a one-year return to its shareholder (Singapore’s Ministry of Finance) of 12%.
For many Singaporeans, it’s easy to presume that Temasek, being an institutional investor, is in a different league on their own. To some extent, this is true. Temasek does have access to much more investment opportunities and funding capabilities, and not to mention, a strong management team, compared to most of us regular retail investors.
However, when you observe Temasek’s investment from a broader perspective, there are some important investment strategies that we can learn from their approach.
As a caveat, we recognise that it’s technically not possible for individuals to replicate Temasek’s portfolio, since it holds close to 40% of its portfolio in private unlisted assets. Also, all views shared are based on our own observations, and do not represent the investment approach or opinion of Temasek.
# 1 Diversification Is Important, But There Is No Need To Over Do It
Don’t put all your eggs into one basket.
Most of us heard this before. Diversification is key when it comes to investing. The idea behind diversification is that we want to spread out our risks as much as possible.
This holds true, whether you are a small-time investor just starting out, or a big institutional investor like Temasek.
There are some ways that investors can diversify their portfolio. For a start, many investors will look to diversify their portfolio across different sectors. We may invest into banks (e.g. DBS, OCBC), telecommunication companies (e.g. SingTel, StarHub) and real estate companies (Capitaland, City Development).
The other way is to invest across different geographical regions. Common markets to consider includes the U.S., China, Japan and Europe.
Recently, we keep hearing investors saying that they have to be well-diversified outside of Singapore. The common reason cited is that the Singapore market is 1) a small market and 2) there are limited growth opportunities.
While there is truth (to some extent) to both of these statements, we think it’s important for investors, especially new ones, not to be over diversifying.
For example, there are robo-advisors in Singapore that hold little or no exposure to Singapore. This isn’t to say that this is bad, but rather, it begets the question of why we are ignoring our own home market, just for the sake of diversification.
Despite being a company that have multiple offices around the world, Temasek is still primarily a Singapore-based investor, holding about 27% of its portfolio in our home country of Singapore. It also holds about 26% of its portfolio in China, and about 13% in the U.S., both of which are the largest two markets in the world.
Do also note that the geographical diversification shown above takes into account the fact that many local companies already have overseas exposure anyway.
For example, DBS hold assets in China. Hence by investing in DBS (a local company), Temasek, or any other DBS shareholders, are indirectly vested in China.
As an investor based in Singapore, we enjoy “home-ground advantage”. We understand our own local market best, and hence, it’s easier for us to be investing in the companies that we see around us.
Another case in point that newbie investors seldom consider is exchange rate fluctuation. If your intention is to live and retire in Singapore, the historical strength of the Singapore Dollar (SGD) should matter to you and is something that you cannot ignore when investing overseas.
Case in point. While Temasek reported its annual Total Shareholder Return (TSR) since inception at 15% p.a in SGD, this figure would actually be higher at 17% p.a. if it was measured in US Dollar (USD).
Our writer Dinesh cautioned about this exact situation in a previous article written where he shared that many Singapore investors are attracted to overseas market because of the higher expected returns, only to realized that the difference in returns between is a lot lower, once you consider exchange rate fluctuation.
In fact, when you calculate the returns delivered by the STI since 1998, with adjustment for exchange rate gain, Singapore has actually outperformed most major markets such as the S&P 500, HSI and FTSE100.
This isn’t to say that diversifying isn’t important (it still is), but that we should not be too fixated to diversify, simply for the sake of it.
# 2 Long-Term Investing Is Important, But Think Of Your Investment Horizon
We advocate that as investors, we should think about long-term performance over short-term gain. This is Temasek’s strategy as well. The organisation has weathered multiple economic crisis since its inception in 1974.
For example, when we track the 10-year returns that Temasek has delivered since 2008 (remember, 2008 was when markets were at a peak, before the Global Financial Crisis), we can see that $1,000 invested 10 years ago would have grown to be $1,626 in 2018. Reasonable, given the circumstances, but not remarkable.
However, if we stretch it back just five years more, we would see that $1,000 invested 15 years ago, will become $4,665 in 2018.
The table above shows the returns that Temasek has delivered based on different time period.
Temasek is a generational investor. What this means is that unlike individuals who have finite investment horizons, Temasek do not have any internal investment horizon that they target for.
As individuals however, we need to know what’s our investment horizon, and to work towards this timeline.
# 3 Don’t Ignore Dividend Income
The topic of dividend sometimes divides investors. On one hand, we have investors who love dividends. These are the folks who are usually looking for cashflow positive blue-chip stocks or Real Estate Investment Trusts (REITs).
On the other hand, there are also investors who don’t believe in investing in companies that pay good dividend. The rationale is that a company which is growing should be able to re-invest its profits internally for higher growth, as opposed to paying out dividends.
Neither approach is wrong.
When we look at Temasek’s portfolio, we can see that it’s okay to have the best of both worlds.
Temasek’s portfolio has been growing in size over the past decade, from S$130 billion in 2009 to S$308 billion, as of 2018.
At the same time, it also enjoys a reasonable dividend payout. Dividend income for the year was S$9 billion. This equates into a return of about 3%, when compared to its net portfolio value.
What you choose to do with your dividend is up to you. You can re-invest it into the same company, other companies or spend it. The point here is that choosing good companies with high dividend payouts and wanting to grow your portfolio size isn’t at odds with one another.
# 4 It’s Perfectly Fine To Divest
As long-term investors, we are sometimes guilty of having the tendency to not want to divest. We argue that since we are long-term investors, we should stick to the companies that have (already) invested in.
Over the past year, Temasek invested S$29 billion into companies while divesting (i.e. sold its shares) S$16 billion. This is something that Temasek have always been doing each year. Over the past decade, the organization has invested S$203 billion and divested about S$150 billion.
Of course, a divestment isn’t necessarily a sign that a company is no longer worth investing into, or has decline in performance.
Investors (including Temasek) divest for various reasons such as to realise capital gains, manage their asset allocation and at time, to adjust in accordance to their changing risk appetite.
As an individual investor, you should not be afraid to sell your shares if the time comes to do so, as long as you are doing it for the right reasons.
# 5 Focus On Growth Sector
The biggest companies today may no longer be the best ones to own 10 years from now. The only constant we can be assured of is that the world’s economic is ever-changing.
As an organisation that has offices all around the world, Temasek is well in-tune with global trends and investment opportunities, and actively seek to capture these trends and opportunities.
For example, in 2011, technology, life sciences, agribusiness, non-bank financial services and the consumer sectors comprise of just 5% of Temasek’s overall portfolio. Today, these fast-growing sectors constitute about 25% of Temasek’s portfolio.
As retail investors, we should not be afraid of riding and investing into these trends. Be it companies which are involved in sustainable living, the sharing economy, healthcare, or social media.
Of course, you can’t just invest without understanding how these growing sectors work, nor should you be investing just because everyone else is doing so.
You need to research, understand and perhaps even experience for yourself all these sectors that you have identified. You need to know who the major players are, the markets they operate in, their expected growth trajectory.
While not all companies are listed and open to public investors (e.g. you can’t invest in Grab today even if you want to), there are sufficient quality companies around the world that you can consider.
From the Alibaba Group in China to Elon Musk’s Tesla in the U.S or even the Mark Zuckerberg-led Facebook, these companies can be considered if you are bullish about any particular sectors.
What Are You Investing For?
When it comes to Temasek, the mandate is clear. Invest on behalf of the Ministry of Finance, which in turn, will benefit Singaporean in the long-term. There is no investment horizon as Singapore is a nation that needs to care for its people, both the present and the future.
Likewise, you need to know the reason why you are investing. By knowing the why, you can then identify the when (your investment horizon), the what (what companies to invest in) and the how (your investment strategy to achieve your goals).
(Top Image Credit: Temasek)