Singapore's sovereign wealth fund GIC has posted a lower 20-year annualised real rate of return of 2.7% for the year ended March 31 2020, down from 3.4% in the previous financial year.
This means that over the past 20 years, from April 2000 to March 2020, GIC has achieved an average annual return of 2.7% — over and above the global inflation rate.
GIC Chief Executive Officer Lim Chow Kiat said the reduction was largely due to the dropping out of a very strong tech-bubble year return 21 years ago, rather than the recent market moves.
The rolling 20-year real rate of return is the primary metric for evaluating GIC’s investment performance, as it represents GIC’s mandate to preserve and enhance the international purchasing power of the reserves under its management over the long term, so as to achieve good returns over global inflation.
In a release on Tuesday, GIC said COVID-19 was an unforeseen shock to the global economic system, which revealed and accentuated certain long-term vulnerabilities and trends.
Lim added that GIC positioned its portfolio defensively as it became “increasingly concerned with high valuations, weakening economic cycle fundamentals, limited room for policy flexibility and geopolitical tensions.”
He noted these conditions could have significantly and permanently impaired GIC’s portfolio. However, GIC had “preemptively de-risked by reducing our allocation to equities in favour of cash, and evaluating investment transactions with more caution.”
He also said the global health and economic outlook remains challenging, and GIC will continue to proactively seek opportunities that will generate good long-term risk-adjusted returns, as well as ensuring that the total GIC portfolio remains resilient to uncertain outcomes.
GIC elaborated that the proportion of developed and emerging market public equities in the GIC portfolio fell, while private asset allocation grew as a percentage of the portfolio. The share of bonds and cash rose as these lower risk assets benefited from the flight to safety.
As for the global investment outlook, Lim expects it to be more challenging due to “pandemic unknowns”, such as the possibility of subsequent waves of infection, Other problems also include fundamental issues such as poor productivity growth, weakened social compacts, high debt burden, and rising geopolitical tensions.
He points out that the pandemic has led the world into uncharted policymaking as governments turn to “unconventional policies of large magnitudes” to support their economies. With global interest rates at 140-year lows, growing political divides, and corporate and public debt levels set to climb even higher, it will be very difficult to calibrate or withdraw these massive stimulus measures as the economy recovers. This introduces policy risks for inflation and currencies that investors have not had to contend with in recent history.
Furthermore, the commitment of major countries to globalisation has diminished, which means governments could also tighten restrictions on foreign labour and capital to protect domestic interests. This is likely to hurt global productivity growth and be particularly detrimental to emerging markets that have historically relied on foreign investments and export-led growth.
Other trends Lim identified would be that industry consolidation will be catalysed as smaller companies fail to survive the Covid-19 crisis, while others will require additional funding, seek alliances or be acquired. Companies with stronger balance sheets and the technological edge are likely to become bigger and stronger.
Amid this crisis, Lim said GIC is committed to maintaining a long-term perspective. “This means emphasising fundamental trends over market sentiments, value over price, and partnerships over transactions.”
