The Asset Update
GIC recovers losses, makes significant changes to asset allocation
09 Dec 2009 by Bayani S Cruz
* Despite restoring its allocation to public equities to pre-crisis levels, GIC has reduced its total allocation to equities from 44% as of March 31 2008 to 38% as of March 2009.
* In 2008-2009, GIC increased its allocation to alternative asset classes to 30% from its previous level of 23% in 2007-2008.
In terms of asset allocation, perhaps the most remarkable decision by the Government of Singapore Investment Corporation Pte Ltd (GIC) in the financial year 2008-2009 was restoring its allocation to public equities to pre-crisis levels.
From July 2007 to September 2008, GIC had reduced its allocation to public equities by 10% because of concerns in early 2007 about an equity overvaluation. The strategy worked by helping to minimize losses in the ensuing bear market. Despite restoring its allocation to public equities to pre-crisis levels, GIC has reduced its total allocation to equities from 44% as of March 31 2008 to 38% as of March 2009.
Nevertheless, in Singapore dollar terms, GIC suffered losses of more than 20% on its portfolio for the year ended March 31 2009. This loss pulled down the 20-year nominal annual rate of return in Singapore dollar terms from 5.8% to 4.4%. The real rate of return, in excess of global inflation, fell from 4.5% to 2.6%. In US dollar terms, the 20-year nominal rate of return was 5.7% as of March 31 2009, according to the GIC Report on the Management of the Government’s Portfolio for the Year 2008/2009.
Established in 1981, GIC’s mission is to invest Singapore’s foreign reserves to earn reasonable returns within acceptable risk limits over the long-term. This is only the second annual report on the management of the government’s portfolio that has been published by the GIC since it was established. The publication of the report greatly improves the transparency of the GIC. Issued on September 23 2009, the report covers the year ending March 31 2009.
Singapore’s foreign exchange reserves stood at US$168.251 billion as of March 2009, according to figures of the Monetary Authority of Singapore.
Recovering bank losses
Another remarkable GIC decision in 2008-2009 was that it substantially increased its allocation to alternative asset classes to 30% from its previous level of 23% in 2007-2008. The increase in alternatives in 2008-2009 is consistent with GIC’s approach in recent years to construct a diversified multi-asset class portfolio by increasing alternative investments such as private equity and real estate.
Following the global financial crisis, GIC has continued to follow this approach even though group investment officer Ng Kok Song says: “This diversification was ineffective in the financial earthquake that occurred last year (2008).”
Noteworthy in 2008-2009, as far as GIC’s asset allocation is concerned, was the fact that it managed to partially recover losses from its investments in two global banks. In early 2008, GIC had made substantial investments in Citigroup and the Union Bank of Switzerland (UBS). Both banks later needed massive government support in the wake of the global financial crisis.
In the case of Citigroup, GIC has recovered the initial loss on its investment. This was made possible by two factors: first is the conversion of its preferred stocks to common stock at a conversion rate of US$3.25 per share; and secondly, the recovery of Citigroup’s share price on the back of improving market sentiment.
Also in 2008-2009, with a view to enhancing portfolio management, group president Lim Siong Guan announced that GIC has consolidated financial planning and management across public and private market asset classes under its finance department. “This will enable us to make better and faster decisions on liquidity and cash management and to execute our financial strategy across the entire portfolio more efficiently.”
|Source : GIC
Balanced asset mix
As of March 31 2009, GIC assets are invested in four asset classes. These include 38% in public equities (down from 44% in 2008), 24% in fixed income (down from 26% in 2008), 30% in alternatives (up from 23% in 2008) and 8% in cash (up from 7% in 2008), according to the report. For public equities, 28% are invested in developed markets as of March 31 2009 (down from 34% in 2008) and 10% are invested in emerging markets (also 10% in 2008). Fixed income assets accounted for 24% of GIC’s portfolio on March 31 2009 (down from 26% in 2008). Of the total fixed income portfolio, 19% were invested in nominal bonds as of March 31 2009 (down from 20% in 2008) while 5% was invested in inflation linked bonds (down from 6% in 2008).
Over the years, fixed income investments have been reduced from over three-quarters of the total portfolio 25 years ago, to the current level of about one quarter. For alternatives, 12% was invested in real estate as of March 31 2009 (up from 10% in 2008); 11% in private equity, venture capital and infrastructure (up from 8% in 2008); 3% in absolute return strategies (the same level as in 2008); and 2% in natural resources (the same level as in 2008).
In recent years, GIC has accelerated the pace of real estate, private equity investments, and hedge funds.
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As of March 31 2009, the assets were invested in four geographic areas: 45% in the Americas (up from 40% in 2008); 29% in Europe (down from 35% in 2008); 24% in Asia (up from 23% in 2008); and 2% in Australasia (the same as in 2008).
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