GIC (or Government of Singapore Investment Corporation in full) was created in 1981 to manage and invest part of our national reserves and seek better returns for Singapore. According to Sovereign Wealth Fund Institute, GIC is the fifth largest Sovereign Wealth Fund with $690 billion in total assets.
This year, GIC reports a real annualised 20-year return of 4.2% per year. Given their aim to invest for Singapore’s long-term future, here’s what investors need to know about GIC’s annual report.
Nominal Return Is 7.0% While Real Return Is 4.2%
As GIC invests for the long-term, returns are evaluated on an annualized 20-year basis.
As of March 2022, the 20-year real rate of return is 4.2%. This is 0.1% lower than last year. Despite the recession fears, this is still a healthy return compared to the two low points of 2.7% in 2020 and 2.6% in 2009.
While the 20-year real (above global inflation) return is 4.2% for 2022, the nominal return is higher at 7.0%. This also clearly shows the impact inflation has on returns.
Inflation Is A Risk Factor
Inflation was highlighted as one of the ongoing risks in GIC’s annual report. As central banks tighten monetary policy, global interest rates have risen. Markets have also priced in faster policy normalisation. Performance across regions, countries and sectors has also differed due to the different pace and magnitude of recovery and correction. While the intent of central banks’ monetary tightening is to bring down inflation while avoiding recession, this may not come to fruition in the current macro environment.
As of March 2022, the geographic mix of GIC’s portfolio comprises the United States (37%), Asia ex Japan (25%), Global (10%), Eurozone (8%), Japan (7%), Middle East, Africa, and the rest of Europe (5%), Latin America (4%) and United Kingdom (4%).
Stagflation, where inflation is accompanied by weak growth, is also mentioned as a concern. While GIC predicts that it is unlikely that we would experience the severity of the stagflation in the 1970s, equities may be vulnerable, especially with extended high valuations. The higher inflation volatility and inflation risk premiums to financial assets will also affect performance. It would also be difficult to achieve portfolio diversification if the correlation between equities and bonds may also turn positive.
To address these risks, GIC diversifies its portfolio and engages in alternative scenario planning. This includes continued investments in real assets such as real estate and infrastructure, which offer protection against inflation. In a high inflation environment, these assets have also generally outperformed nominal bonds. They have also increased their allocation to certain high growth asset classes within equities, such as private equity that can provide returns to keep pace with rising inflation.
Allocations to Real Estate and Private Equity increased in 2022, from 8% to 10% and 15% to 17% respectively.
Investing In The Long Term Doesn’t Mean That Immediate Events Do Not Affect Returns
Investing for Singapore’s future gives GIC a different perspective. With a timeframe longer than most investors, GIC invests in the long term.
Even though, GIC monitors the ongoing intermediate investment performance (i.e. over 10 years, 5 years), the primary metric for tracking GIC’s performance is the rolling 20-year return above global inflation.
However, this doesn’t make GIC immune from market volatility. According to GIC, “even though the rolling 20-year real rate of return is intended to measure returns over the long term, it can still reflect a significant cyclical element. This is particularly evident when the cycles are very pronounced at the start or end of the 20-year window. For example, a 20-year period from 1999 to 2018 would include both the sharp rise in valuations resulting from the dot-com boom in 1999 and 2000 and the subsequent bust in 2001, whilst a 20-year period from 2001 to 2020 would be negatively affected by the large decline in asset prices from the dot-com bust in 2001.”
A Vision For Long Term Investment
Investing in the long term also means looking beyond current market performance to invest in the future. For GIC, this plays out in the form of sustainability. They “believe that companies with strong sustainability practices offer prospects of better risk-adjusted returns over the long term, and that this relationship will strengthen over time as market externalities get priced in and are incorporated into the decisions of regulators, businesses, and consumers.”
The long-term nature of GIC investments also pairs well with sustainable investing as the sustainable solutions may take a long time (and scale) before reaching their full potential. GIC has established a dedicated office focusing on sustainability as it focuses on the global shift towards a low-carbon economy.
Investors looking to emulate some part of GIC’s investment portfolio need to keep in mind the long-term timeframe that GIC has in order to achieve its mandate to preserve and enhance Singapore’s international purchasing power over the long term. This is a timeframe that spans more than a single generation
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