GIC investment climate still 'challenging': Update

The Government of Singapore Investment Corp., the city’s sovereign wealth fund, said the investment environment remains “challenging” as inflation risks increase and the recovery of developed nations falter.

GIC, manager of more than US$100 billion ($120.4 billion) of Singapore’s reserves, said in its annual report today that it boosted investments in emerging economies to tap their potentially higher returns, and cut back in Europe and the U.S.

“The sustainable recovery of the developed economies remains uncertain, while the emerging economies face challenges in restraining inflationary pressure and currency appreciation,” Chief Investment Officer Ng Kok Song said in an e-mailed statement today that accompanied the report. “GIC will continue to respond nimbly to this challenging environment.”

 

The fund, the biggest investor in companies including Citigroup Inc. and UBS AG, seeks to boost assets to tackle future crises and meet the island state’s long-term spending needs. GIC is ranked the world’s eighth-largest state investment company by Sovereign Wealth Fund Institute.

 

The 20-year so-called nominal annualized rate of return was 7.2% in U.S. dollar terms as of end-March, said GIC, established 30 years ago. The annualized real rate of return, in excess of global inflation, rose to 3.9% in the year ended March from 3.8% in the previous 12 months, it said.

 

SHORTER TERM RETURNS

The investment company also published five-year and 10-year nominal rates of returns for the first time. Annual returns in the past five years, net of fees, was 6.3%, with a volatility of 12%, while the 10-year rate was 7.4%, with a volatility of 10%, according to the statement, released along with the annual report.

 

Emerging-market stocks made up 15% of its holdings from 10% a year earlier, while those in developed economies fell to 34% from 41%, it said in the report. The MSCI Emerging Markets Index climbed 16% in the year ended March, compared with the 11% advance in the MSCI World Index, which tracks developed nations.

 

GIC’s holdings in equities dropped to 49% from 51%, it said, while bonds made up 22% now, from 20% a year earlier. So-called alternative investments were little changed at 26% of its portfolio, with real estate increased to 10% from 9%, it said. Cash made up 3% from 4% a year earlier.

 

U.S., EUROPE

European holdings were reduced to 28% from 30%, and those in the U.S. were lowered to 42% from 43%, it said. Within those markets, it increased its investments in Latin America and the U.K. Asia had the biggest boost, rising to 27% from 24%, it said.

 

Temasek Holdings Pte, Singapore’s state-owned investment company, said July 7 the value of its assets climbed 3.8% to a record $193 billion in the year ended March. The company, which had a 10-year total shareholder return of 9% and 7% over five years, also spent more in emerging markets including China, India, Brazil and Mexico.

 

GIC’s long-term view on Citigroup and UBS “remains unchanged” even with higher capital requirements that are likely to reduce the banks’ future profitability, the Business Times reported today, citing Ng’s comments at a press conference yesterday.

 

The bulk of GIC’s European investments is in the U.K., France and Germany, while those in countries affected by the regional debt crisis including Greece, Ireland and Portugal are “negligible,” the newspaper reported, citing Ng.

 

EMERGING MARKETS

China, Brazil, Taiwan, South Korea, India and South Africa accounted for almost three-quarters GIC’s investments in emerging-market stocks, the newspaper said, citing Ng. More than half of the real estate investments are in China, Japan and increasingly in India, according to the report.

 

Tony Tan, GIC’s deputy chairman and executive director, resigned July 1 as he seeks to run for president of the city- state as an independent candidate. He was a former deputy prime minister of Singapore.

 

If elected, Tan, 71, will be the city-state’s third president since the constitution was amended 20 years ago to allow elections for what had been a largely ceremonial role. The change also gave the president the responsibility to safeguard the national reserves and veto rights on government budgets and key appointments to public office during the six-year term, according to the government’s website.

 

NEXT CRISIS

The next financial crisis may come five years later and be more severe than the one in 2008, the Business Times reported on July 20, citing Tan. The global financial system avoided a “total collapse” in 2008 because of the U.S. Federal Reserve’s intervention, the newspaper said, citing Tan. The U.S. is GIC’s biggest investment destination, making up 33% of its holdings, down from 36% a year earlier, the fund said in its report today.

 

President Barack Obama yesterday warned that the nation’s burgeoning deficit threatens to do “serious” damage to the economy and pressured Congress to reach a compromise on a deal to raise the US$14.3 trillion (417.2 trillion) debt ceiling and address future shortfalls.

 

“I suspect confidence will take a fairly big hit,” Stephen Halmarick, the Sydney-based head of investment markets research at Colonial First State Global Asset Management, which oversees about US$150 billion, said in a Bloomberg Television interview. “You would see people downgrading the growth forecast pretty aggressively for the second half of this year and into 2012.”

 

GIC named Singapore Prime Minister Lee Hsien Loong as chairman on May 31, succeeding his father Lee Kuan Yew. The elder Lee, who also resigned from the cabinet in May to make way for younger leaders, took the role of senior adviser at the sovereign wealth fund.

 

Prime Minister Lee’s People’s Action Party won the May general election with the smallest margin of popular votes since independence. The party that has ruled Singapore for more than five decades won 81 out of 87 parliamentary seats and 60.1% of the popular vote.