Rates of Return for GIC and Temasek Holdings

20 Mr Leon Perera asked the Minister for Finance (a) why is the gap between GIC's nominal return and its reference portfolio return higher over the past five years versus the past 20 years; (b) how have GIC and Temasek Holdings performed in terms of annualised rate of return over the past 10 years versus major international sovereign wealth funds, such as those of Norway, Qatar, UAE, China, Hong Kong, Australia and Saudi Arabia; and (c) how do GIC and Temasek Holding's total management and operating expenses as a share of assets managed compare against the average for leading global sovereign wealth funds.

The Second Minister for Finance (Mr Lawrence Wong) (for the Minister for Finance): Mr Speaker, the answer to Mr Perera's first question can be found in GIC's latest Annual Report, which is, in fact, available online.

But since Mr Perera has asked the question, let me quote the answer from page 15 of the GIC Annual Report, which states "…the difference in the returns between the GIC Portfolio and Reference Portfolio is largely due to the difference in risk exposures. The GIC Portfolio has a more diversified asset composition, as well as a lower exposure to developed market, or DM (Developed Market) equities. In addition, increasingly stretched valuations in DM equities have prompted a reduced allocation to this asset class in the GIC Portfolio in recent years. This has resulted in lower returns compared to the Reference Portfolio over the five-year period, as DM equities, especially those in the US, have done particularly well. However, we believe the high valuations of DM equities portend lower future returns." This was explained in the GIC Annual Report.

Mr Perera also asked for a comparison of GIC and Temasek with other Sovereign Wealth Funds, in terms of their returns and expenses. It is not meaningful to compare returns and expenses across different entities globally as they have different mandates, risk profiles and operating constraints. All else being equal, a fund of a higher risk profile should generate higher returns over time, but the outcomes will be more volatile. As another example, a fund that is purely invested in publicly-listed equities and bonds would likely incur lower expenses than a fund that invests in real estate and private equity, as these are markets which are harder to access, but have the potential to yield further returns.

Therefore, the Government's approach is not to apply a single benchmark, as my colleague Senior Minister of State Indranee Rajah had explained in a reply to another Parliamentary Question in July 2017 on a related matter. Instead, the Government evaluates the investment entities' performance by looking at their long-term returns, taking into account risk exposure, underlying market trends and other factors relevant to each entity.

On the whole, the Government's view is that GIC and Temasek have performed creditably in challenging market conditions.

Mr Leon Perera (Non-Constituency Member): Thank you, Speaker. I thank the Minister for his reply. I have a few supplementary questions.

Firstly, if the gap between the Reference Portfolio returns and the actual GIC returns widens in the future, under what conditions or what trigger point will MOF actually intervene to request for changes, either to the strategy or personnel of GIC?

Secondly, just to follow the line of questioning about the allocation to developed market equities: why did GIC reduce its allocation to developed market equities in such a big way in the years 2010 to 2012 and then continue to do so gradually until 2016, missing the surge in developed market equities within the last five-year period? Because even if one takes the view that these developed market equities might not hold good long-term returns, one could still have executed a strategy whereby this asset class was used to generate short-term returns before taking profit and exiting over the past five years. That is my second question.

My third supplementary question is really about benchmarking of performance. In response to what the Minister said, I would like to ask: why the fact that the different Sovereign Wealth Funds may have different risk profiles and so on is the reason for not benchmarking performance against them? One can still compare one's performance against other Sovereign Wealth Funds, even if they have different strategies, different risk profiles, for the sake of referencing the performance and referencing the strategy as well.

The fourth question: if such benchmarking is not being done against other Sovereign Wealth Funds, how does the Government derive an understanding of what is a good return and a good performance versus one that is less than good?

Mr Lawrence Wong: Mr Speaker, there is a series of questions. I will take them in turn.

First, under what conditions will the Government intervene? Of course, if, on a continuous basis, there is under-performance by GIC, then certainly MOF and the Government will have to review fundamentally what has gone wrong and whether the strategies that GIC has undertaken are, indeed, the right ones.

On DM equities, I think it is easy to judge the reduced weightage by GIC on DM equities on hindsight and say that, "Look, they could have easily kept the weightage on DM equities over the last five years and rode the wave", but this is looking back on hindsight.

I think the assessment by most market players and investment entities are that DM equities are, indeed, high in valuation and there is considerable uncertainty in DM equities today. One can take a short-term view, of course, and say, "Let's play the short-term game", but GIC is not a short-term player. GIC invests in the long-term and, in situations where there is market exuberance like now, GIC correctly, we think, takes a view that is more conservative and reduces its weightage on DM equities accordingly.

On benchmarking, that is really a function of risk and return. As I have said earlier, the higher the risk, then, potentially, the higher returns one gets. The Government has already set a Reference Portfolio which expresses the risk that we are prepared to take and GIC is allocated that risk budget and has to perform and achieve maximum returns according to that risk budget that it is accorded.

So, the way we can easily evaluate GIC's performance is by looking at what is the amount of risk it takes and whether the returns it is getting are commensurate with the risk that it is undertaking in its portfolio. That is the benchmark or evaluation that we have put in place for GIC's investment strategies.

Mr Leon Perera: Thank you, Speaker. Just a quick clarification of what the Minister has said. So, is it right to say that the benchmarking is done only with respect to the Reference Portfolio which is the primary means of benchmarking good performance and differentiating good from bad performance right now with GIC?

Mr Lawrence Wong: Mr Speaker, the matrix that we have put in place is, indeed, as I have described with the Reference Portfolio, with the risk budget and the returns that we measure based on the risk that is allocated. Of course, we always look at other investors, not necessarily Sovereign Wealth investors, because GIC also engages external fund managers. So, there is always a look at what other investment entities are achieving for the risks they are undertaking and the returns they are achieving.

We can also track performance by looking at the benchmarks like MSCI. There is a range of benchmarks that we look at. But, ultimately, when we look at GIC's performance, we look at the risk that we have accorded to them, how much risk they are taking based on the budget that is allocated to them and the returns that are commensurate with the risk that they have taken.