Lower Investment Returns Reported by Temasek Holdings and GIC

5 Mr Saktiandi Supaat asked the Prime Minister and Minister for Finance (a) whether the Government assesses that Temasek’s and GIC’s risk-adjusted returns relative to appropriate global benchmarks remain competitive; and (b) how their mandates should evolve to balance capital preservation with the need for higher real returns ahead.

6 Mr Shawn Loh asked the Prime Minister and Minister for Finance (a) whether the investment returns of GIC and Temasek Holdings have underperformed the Government's expectation; (b) if so, whether there is an impact on the Government's Net Investment Returns Contribution to the Budget; and (c) what steps have been taken to ensure that the investment entities have incentives that are aligned to achieve better performance.

7 Mr Shawn Loh asked the Prime Minister and Minister for Finance (a) whether the Government has assessed the merits of a low-cost passive index-tracking investment approach for its investments; (b) whether the Government has compared this to GIC and Temasek Holdings’ active and more costly investment management approaches; and (c) if so, what are the considerations in deciding to give GIC and Temasek Holdings the investment mandates to choose the latter approach.

8 Mr Liang Eng Hwa asked the Prime Minister and Minister for Finance (a) whether the Government is satisfied with the long-term investment performances of GIC, Temasek and MAS when measured against the relevant risk-adjusted global benchmarks; and (b) whether the Government sees the need to review the capital allocation and investment risks framework of GIC, Temasek and MAS.

9 Mr Fadli Fawzi asked the Prime Minister and Minister for Finance (a) whether the difference between GIC's investment returns and the interest payments made by the Government to the CPF Board on Special Singapore Government Securities has narrowed in tandem with the underperformance of GIC relative to other major sovereign wealth funds; and (b) if so, how will this impact the Government's fiscal position or rate of reserves accumulation.

10 Assoc Prof Jamus Jerome Lim asked the Prime Minister and Minister for Finance (a) whether the Government is aware if GIC uses risk-adjusted performance metrics such as the Sharpe ratio in assessing portfolio performance relative to its reference portfolio; and (b) if so, whether a description of such metrics can be provided at a high level.

11 Mr Liang Eng Hwa asked the Prime Minister and Minister for Finance (a) in view of the fragmenting global geopolitical environment and its associated investment risks, whether the Government sees the need to review the current investment mandates of both GIC and Temasek; and (b) whether the emerging investment landscape is assessed to be conducive to sustaining a steady Net Investment Returns Contribution in the next decade.

The Senior Minister of State for Finance (Mr Jeffrey Siow) (for the Prime Minister and Minister for Finance): Mr Speaker, may I have your permission to answer Question Nos 5 to 11 in today's Order Paper together?

Mr Speaker: Please proceed.

Mr Jeffrey Siow: Thank you. My reply will also cover Question No 4 for written answer filed by Mr Ng Shi Xuan for today's Sitting.

Mr Speaker, recent media reports have compared the performance of GIC and Temasek with that of other funds, including other sovereign wealth funds. Such comparisons are often done, but they should be interpreted in their proper context because different funds operate under different mandates and risk profiles.

The Government assesses GIC and Temasek's performance primarily against their respective mandates and risk profiles, and not with other funds. Our focus has always been on long-term performance, rather than on short-term or year-to-year fluctuations.

GIC is the Government's fund manager, and its mandate is to preserve and enhance the international purchasing power of the assets under its management. In recent years, GIC took pre-emptive measures to moderate its risk exposure, in anticipation of increased market volatility and heightened valuations. These measures were intended to keep portfolio risks within acceptable limits and to guard against the possibility of significant asset impairment in the event of a sharp market correction. But as equity markets have continued to remain elevated, these prudent de-risking measures resulted in some foregone returns.

Any assessment of returns must, therefore, be considered alongside the risks that are taken to achieve them – a point that Assoc Prof Jamus Lim made, where he referred to the Sharpe ratio in his Parliamentary Question (PQ). GIC monitors a wide range of risk indicators, including and beyond the Sharpe ratio. In fact, GIC publishes both the returns and volatility or the risks associated with its portfolio in its annual report to provide a more complete picture.

Ultimately, what is more important is the longer-term performance that is achieved within acceptable risk limits. On that basis, GIC has achieved a real return of 3.8% per annum over the past 20 years. This outcome reflects, in part, GIC’s active management, which enabled it to consistently add value to portfolio returns, preserve the international purchasing power of the assets under its management and deliver returns above global inflation.

Temasek began as a holding company for the Government’s local assets. While Singapore-based Temasek Portfolio Companies (TPCs) continue to form a core part of its total portfolio, Temasek has progressively expanded its direct equity investments overseas – initially in Asia, and more recently, across global markets.

Temasek operates mainly as an active, bottom-up investor. It does not operate against a conventional reference portfolio. Instead, it invests directly in companies in the geographies and domains where it has built deep capabilities, and where it sees long-term growth potential. Relative to GIC, Temasek therefore operates at the higher end of the risk spectrum.

In recent years, Temasek’s performance was affected by the performance of the Chinese market, though this was mitigated by higher returns from its growing investments in Europe and the United States (US). Nonetheless, over the last 20-year period, Temasek has reported a Total Shareholder Return of 8% per annum in US dollar terms.

Taken as a whole, the Government’s assessment is that the returns generated by GIC and Temasek are reasonable and within expectations, given their mandates and risk profiles. We will continue to review their mandates and performance regularly, in line with changes in the global economic investment landscape.

Some Members asked about the implications of our investment entities’ recent performance on the sustainability of the Net Investment Returns Contribution (NIRC) and the Government’s ability to meet our Central Provident Fund (CPF) liabilities. As explained in this House previously, the Net Investment Return framework was designed to ensure a steady and sustainable stream of income for the annual Budget. The NIRC is thus derived from the expected long-term real rate of return which the Reserves can sustain, and not short-term market returns.

The Government is able to meet all debt servicing costs and obligations, including the committed CPF rates through the Special Singapore Government Securities (SSGS). GIC does not just manage the SSGS or CPF monies on their own, but a combined pool of Government funds, including a significant sum of unencumbered assets. This approach allows GIC to invest for the long term and to secure good long-term returns.

As investment markets are uncertain and volatile, GIC’s returns over shorter periods could be low or even negative. But the Government is able to absorb these short-term market risks, because it has a strong balance sheet. This substantial buffer of net assets enables the Government to meet the obligations on its liabilities and continues to underpin the Government’s strong fiscal position.

Mr Speaker: Mr Saktiandi Supaat.

Mr Saktiandi Supaat (Bishan-Toa Payoh): Thank you, Mr Speaker. I have two supplementary questions. First of all, I would like to declare that I am an employee of a financial institution.

Mr Speaker, the income from the Reserves play an important role in the Government's revenue, but as the Senior Minister of State has mentioned, the environment has become more volatile. Global markets have become more volatile. In the previous PQ, we have actually discussed about expenditure on healthcare and others being more demanding.

So, my two supplementary questions, Mr Speaker: first, how will the Ministry model the impact of a prolonged global resolve cycle on sovereign investment returns and the resulting implications for the Budget stability and social spending sustainability?

My second supplementary question is whether the Government plans to enhance long-term public reporting on portfolio risks? I think the Acting Minister mentioned the Sharpe ratio and others as well. But in terms of public reporting on portfolio risks, volatility and drawdowns for Singapore's foreign investment entities to strengthen public confidence, as reliance on investment income increases?

Mr Jeffrey Siow: Mr Speaker, I thank the hon Member for his supplementary questions. The Government's approach on assessing the returns of our investment entities is to take a long-term view. Market outcomes will inevitably fluctuate from year to year, there will be periods where returns are weak. But the way our system works is that these are not directly linked to our NIRC.

The Government's strong balance sheet, as I explained earlier in my reply, enables it to take investment risks and ride out market cycles that are inherent in investing for the long term. We have a significant buffer on net assets, which enables the Government to guarantee CPF savings and pay fair interest rates on CPF savings despite changes in the financial cycle. And this is also why we are able to have a significant stream of investment income through the NIRC, which is then used to meet important spending priorities, as we discussed earlier.

The Net Investment Returns taken into the Government Budget every year is based on the long-term expected returns of the investment entities, not on the year-to-year returns, which can fluctuate. In addition, the asset base that is used to calculate the NIRC is smoothed over the long term. So, the impact of a single year, or even a few years' worth of lower returns will take time to be passed through to the NIRC due to the smoothing of the asset base.

Notwithstanding all these, we recognise that it is becoming structurally more difficult or more challenging to generate good investment returns in the current global environment and this trend is likely to persist in the longer term. Hence, the Government will indeed have to monitor this and take a prudent approach to ensure that our investment income is able to meet our spending and our long-term obligations.

On the hon Member's question on whether or not the Government intends to enhance long-term public reporting, I think the investment entities already provide quite a good amount of public information on their investment approach and on their returns. This can be found in their annual reports, their regular press releases, and occasionally in their opinion and research pieces which they put out.

GIC discloses their five-, 10- and 20-year returns, but we have spoken in this House before about how we do not disclose their total assets under management, because we do not want to encourage speculative attacks on the Singapore dollar.

Temasek, as a direct investor, releases even more information. They talk about total portfolio value, its investment approach, the domains and the geographical areas where they are investing. And I will encourage Members as well as members of the public to look at the information that they put online.

Over time, GIC and Temasek have disclosed more information, and we will continue to encourage them to review if there are other meaningful disclosures to make. Our principle is that what the entities disclose should be part of an overall system that enables them to maximise their ability to generate long-term returns.

Mr Speaker: Assoc Prof Jamus Lim.

Assoc Prof Jamus Jerome Lim (Sengkang): Thank you, Speaker. I have two supplementary questions, one on GIC and the other on Temasek. I understand that GIC has publicly stated that it does not regard its 65/35 Global Equity Bond Reference portfolio as a benchmark, but rather as an expression of risk tolerance. GIC has also publicly stated that it has attained lower returns, but with lower volatility.

For me, taken together, that suggests that GIC has either taken less risk than what its reference portfolio would suggest, or that it has returned less than what might be expected, given its risk profile. So, my question is whether the Ministry plans to undertake any steps to address the lower returns received by GIC relative to its reference portfolio; or if it is indeed satisfied with this more conservative approach, why does it not request GIC to adopt a different reference portfolio with lower risk?

My second question is on Temasek and I note the Minister's response on how its mandate is more to focus on companies rather than indexes. Nevertheless, I wonder if the Minister would be able to share how Temasek has performed on a risk adjusted basis, relative to the other sovereign wealth fund, GIC? And if indeed it is taking on such concentrated risk, I also wonder if there is room to reconsider its geographical diversification strategy adopted in the early 2000s and return to a more domestically oriented mandate.

Mr Jeffrey Siow: Thank you, Mr Speaker. As I mentioned in my reply earlier, the Government assesses the returns of our investment entities based on their mandates and risk profiles. GIC has achieved a real return of 3.8% per annum over the past 20 years, which is within the Government's expectations, given the risk profile that we have given.

The Member referred to the 65/35 reference portfolio, which is on the GIC website. That is not a returns benchmark, but is an expression of our risk tolerance and the risk profile we would like GIC to take. Ultimately, the Government assesses GIC performance based primarily on whether it has met this mandate. There will be periods where GIC takes less risk than the reference portfolio. And as I mentioned in my earlier reply, GIC did pre-emptively decide to de-risk in periods which had resulted in foregone returns. At the same time, GIC returns were much less volatile in the same timeframe and in fact, have outperformed the reference portfolio on a risk adjusted basis, given that it has achieved higher returns per unit of volatility.

Should GIC not have de-risked and ridden through the drawdowns? I think that is a matter of a judgement. While one can ride through market cycles, there have also been instances where the stocks or the assets are permanently impaired. And because of the mandate of GIC, it has to balance with the need to preserve our capital assets, I think that is a judgement that they have taken. On hindsight, we can always make all sorts of assertions, but they have taken that decision to de-risk and preserve our capital, and still be able to make the returns that we expect of them.

Ultimately, every investment fund must operate according to its own mandate and risk appetite. We expect GIC to construct its portfolio to both safeguard our assets and to also achieve our returns. The approach that they have taken has helped them build a diversified portfolio that is resilient to market cycles and volatility, while achieving good risk adjusted returns.

On the hon Member's second question on how to assess Temasek's performance, as I mentioned earlier, Temasek is different from GIC. It is a bottom-up active investor. It has a history of how it has gotten to where it is today. It started off as a holding company for Singapore Temasek-linked portfolio companies. Over time, it has broadened its coverage to include investments globally. It has, in the process of doing so, tried to give a sense of how it is performing on these areas, and on its website, it has referred to a few international indexes, whether it is the MSCI World Index or the Singapore stock market Index when it comes to measuring performance of the local companies.

I think these are possible ways of seeing how they are performing. We do not intervene in individual investment decisions that are made by Temasek. So, which geographies they choose to go into and which domains they prefer to invest in, these are things we leave to the management. The Government works with the board to make sure that Temasek meets the mandate that we have set out for them and we do not want to have to intervene in these decisions that they make on individual investments.

Mr Speaker: Mr Shawn Loh.

Mr Shawn Loh (Jalan Besar): Thank you, Mr Speaker. And a Happy New Year to all Parliamentary colleagues, including our Nominated Member of Parliament colleagues.

With regard to the Senior Minister of State's reply, I fully agree and accept that global rankings of investment returns are not helpful because they do not take into account the unique investment mandates and the unique contexts that each country's investment entity invest in.

Our investment entities should have clear benchmarks and should take into account our own unique context, including, as the Senior Minister of State mentioned, that one fifth of our national Budget is from the returns on our investments and the Government has an obligation to pay interest rates on the CPF savings. To that end, I have two questions.

The first question is, when should we worry? I note the Senior Minister of State's reply, but when should we worry? What level of long-term investment returns should be the threshold which triggers a Government review of the NIRC framework to look at its sustainability, based on new structural trends in the global investment climate?

And the second question is in regard to the fact that GIC and Temasek are active managers that have illiquid portfolios. We should expect better returns from active investment managers, as well as a premium from illiquidity. How is the Government convinced that the active investment approach taken by GIC and Temasek is giving the alpha that Singaporeans deserve on the Reserves and on their CPF savings?

Mr Jeffrey Siow: Thank you, Mr Speaker. I thank the hon Member for his questions. I agree with the hon Member that we should recognise that it has become more challenging to generate good investment returns in the current global environment and that this trend is likely to persist in the longer term. That is why the Government will continue to take a prudent approach in ensuring that our investment income is able to meet our long-term obligations.

But as I have explained earlier, the basis for why we are able to do the things that we are doing today is not because of year-to-year fluctuations in terms of market performance. In fact, the system is structured such that we are able to ride out some of these year-to-year fluctuations, even periods of sustained global under-performance in markets, because we have a large asset base and because we are able to take a long-term view of our investment returns.

And so, in that sense, I think we have to continue to make sure that the mandates of the investment entities continue to be met, that they understand that they are doing this for the longer term, and they are able to take strategies and to take the right decisions to ensure that the returns over the longer term are indeed sustainable.

As to whether we should be concerned whether the GIC and our investment entities are earning alpha, I think it is quite understandable that we look at how potentially the investment entities performance are benchmarked towards, for example, simple passive global benchmarks. When we do not have investment expertise or do not have time to make investments, the most common investment advice is just leave it to the market. We decide to buy an index fund, let them decide what to do.

But that is not what we are doing, because GIC here is the Government's fund manager. They are the professionals. They have a large pool of assets that range from the passive assets to assets that require them to take a closer monitoring and to make sure that those assets continue to generate high returns and they have to make active decisions to manage them.

Overall, the GIC team has been doing so over the years and their track record, given the mandate they have been given, demonstrates that they are able to do so. They have taken the decision as we talked about, to de-risk during periods of distress, during COVID, for instance, in the recent years. If they had not done so, our asset base could have been permanently impaired, as other funds would have experienced during this period.

So, I think we have to leave the professionals to do the work that they do. The Government works with the GIC board to make sure that the mandate continues to be met, given the risk profile of what we want them to do, to take a more conservative approach, to preserve our capital base. And we think they have met the expectations in this regard.

Mr Speaker: Mr Liang Eng Hwa.

Mr Liang Eng Hwa (Bukit Panjang): Thank you, Sir. Let me first declare my interest as I work in an entity significantly owned by Temasek.

There are two questions for the Acting Minister. Firstly, we know that Temasek and GIC do compete with the fast growing global sovereign wealth funds, the global funds, such as the pension funds, the wealth houses and so on – chasing for limited good investment grade targets, which may ultimately impact their returns, because there is competition for all these investments. So, can I ask the Acting Minister, whether the Ministry of Finance sees investing more of our Reserves into the local infrastructures that comes with commercial returns, as another way to deploy our growing Reserves?

My second question is related to what the Acting Minister has said in his reply on Temasek. There are two parts. One portfolio is the local companies that they hold. For strategic reasons, we want to hold these companies. And the other one is the international portfolio, which actually comes with different management investment skills. And as such, we will have to assess for their difference in performance. For example, the holding company for the strategic companies that we hold, like Singapore Airlines or PSA and so on, we would not expect Temasek to actively trade this portfolio or choose levels to buy and sell; whereas the international portfolio, there are some investment decisions to be made there, and how they charge the market, how they perform; we want to assess that.

So, can I ask that Acting Minister, whether in terms of evaluating the performance of Temasek, would the Ministry consider carving out that local portfolio, that we hold for strategic reasons, to measure the performance separately from the portfolio that is invested internationally?

Mr Jeffrey Siow: Thank you, Mr Speaker. The hon Member asked two questions. Number one, I think is on whether or not, given the competition with global funds, whether Temasek or GIC should take a different focus and to focus on investment in local infrastructure – I think that was the first question. And the second question, was whether or not, given that it has a cluster, in terms of local Singapore companies, whether we should evaluate performance differently. I think in gist, those are the two questions.

On the first question, I think we do not work on the basis of individual investment decisions. I think we want to structure how the relationship between the Government and our investment entities, structure them at the broad level to enable them to fulfil this mandate of achieving sustainable returns, preserving our asset base, while giving them, as commercial entities, the freedom to do the things that they need to do. And so, insofar as requiring them to have a specific investment focus or to invest locally, I think that is something as an entity, they need to decide and in light of the mandate that we have given them, to see whether that it is the most preferred strategy. So, we will not direct it personally or directly, but we would leave them to make those decisions.

As to whether or not we should carve them out separately to have a separate entity and evaluate the performance of the parts of Temasek that looks after our TPCs, I think we have to take this in context of how Temasek has evolved its capabilities over time. As the hon Member said, it started off as a company with deep expertise in managing our local TPCs. Over time, it is moving towards becoming more of a global investor with more geographical diversification and thus, this also requires Temasek to build up its own capabilities – just as it had built up its capabilities managing the portfolio of Temasek companies.

I think it is a matter of judgement for them to do this, as long as they achieve the mandate that we have given to them. Overall, looking at the total portfolio of Temasek's assets, I think as long as it can generate sustainable returns as a portfolio, that will be a good outcome. Bearing in mind also that there are synergies between the different portfolios. In managing the local Temasek-linked companies, there are benefits to having a global outlook on matters, having some global expertise and domain expertise in different areas, which I think Temasek is very focused on trying to generate as a result of their investment disposition.

Mr Speaker: Last supplementary question. Mr Fadli Fawzi.

Mr Fadli Fawzi (Aljunied): Thank you, Mr Speaker. Firstly, can the Acting Minister clarify whether the difference between GIC's investment returns and the SSGS interest payments made by the Government to the CPF Board, goes directly to the Reserves?

My second question is how does the Government intend to act under a scenario where GIC's returns consistently underperform SSGS interest rates? Would it then be sustainable for the Government to continue maintaining the current SSGS interest rates?

Mr Jeffrey Siow: Mr Speaker, I think I will go back to explaining how the basic features of the system work. The Government has a strong balance sheet. This enables us to take investment risks and to ride out the market cycles that are inherent in investing for the longer term. We have a significant buffer of net assets, which enables the Government to guarantee CPF savings and to pay fair interest rates on CPF savings despite market cycles. The way this is done is it insulates the CPF returns and interest rates from the vagaries of the market.

Sir, we have explained this before and I think we do not have to go through the whole process again. I think the Member has asked a question on this previously as well and we can refer to the answer there.