What Singaporeans Need to Know About GIC's Portfolio Performance (2021)

On Friday (23 Jul 2021), the Government of Singapore Investment Corporation (GIC) released its 2020/2021 GIC Report.

As global economies recover from the impact of the COVID-19 outbreak, the Singapore sovereign wealth fund reported better performance compared to 2019/2020.

For the year ending 31 Mar 2021, GIC reported that its annualised 20-year real return on its portfolio above global inflation was 4.3 per cent.

This is higher 1.6 per cent higher than the previous financial year’s annualised 20-year real return of 2.7 per cent.

What does this all mean?

Let’s dive deeper into the report to find out!

TL;DR: Key Takeaways From GIC Singapore’s Performance in 2021

For the year ending 31 Mar 2021, GIC reported that its annualised 20-year real return on its portfolio after adjusting for global inflation and net of costs and fees incurred in the management of the portfolio was 4.3 per cent.

Whereas its nominal USD Returns (i.e. Not Adjusted for Global Inflation) are as follows:

*The GIC Portfolio rates of return are computed on a time-weighted basis, net of costs and fees incurred in the management of the portfolio.

**Volatility is computed using the standard deviation of the monthly returns of the GIC Portfolio over the specified time horizon.

What is GIC Singapore’s 20-Year Annual Real Return?

Before we start, it is important for you to understand the 20-year annual real return metric as it is the primary yardstick that GIC uses to measure its investment performance.

FYI: This rate of return is adjusted for global inflation.

This metric refers to the average time-weighted portfolio return over the stated time period of 20 years.

More specifically, the time-weighted return (TWR) is a measure of a fund’s compounded rate of growth over a specific time period.

TWR doe not take into account the effects of investor cash outflow and inflow to and fro from the fund.

As such this TWR is a good measure of investment management skill between any two time periods as it ignores the distorting effects of cash inflow and outflow.

What Are Rolling Returns?

The next important aspect of this metric is that the investment return figure is a rolling return that measures the annualised average returns for a time frame and stops at the listed year.

In other words, GIC’s 20-year return this year accounts for the years between 2002 to 2021.

Next year, the returns will take into the performance from 2003 to 2022 and so on and so forth.

With the addition of each new year, the earliest year is removed from the calculation of the rolling return.

Thus any changes to this rolling return figure are due to the difference in investment returns from the earliest year and the latest added year.

1. GIC Singapore’s 20 Year Annualised Real Returns Increased to 4.3% in 2020/2021

This leads me to the elephant in the room — GIC’s investment performance this year.

For the year ending 31 Mar 2021, GIC reported that its annualised 20-year real return on its portfolio after adjusting for global inflation was 4.3 per cent.

This is higher 1.6 per cent higher than the previous financial year’s annualised 20-year real return of 2.7 per cent.

These returns go to Singapore’s annual budget via the Net Investment Returns Contribution (NIRC) route.

FYI: Aside from GIC, Singapore’s NIRC are also supplemented by Temasek and the Monetary Authority of Singapore (MAS) as well.

Even though the performance does not take into account the outflows, it may limit GIC’s capacity to invest, as a portion has to be set aside from investments to benefit the country’s economy and its citizens.

In addition, GIC has provided data about its portfolio’s recent performance.

GIC Portfolio Nominal USD Returns (i.e. Not Adjusted for Global Inflation)

The higher five-year returns can be attributed to the strong stock market recovery we saw last year.

2. GIC Portfolio: Weightage of Emerging Market Equities, Private Equity and Real Estate Increased

While the COVID-19 crisis has exposed the fragility of the investment landscape, GIC acted in accordance with its investment framework to navigate these uncertain times.

2020 was a rough year for the global economy as it contracted by 3.3 per cent largely due to the widespread lockdowns worldwide targeted at slowing down the spread of COVID-19.

This contraction was terrible as in comparison the global economy only experienced a 0.1 per cent contraction during the Global Financial Crisis.

But despite the economy being ravaged, the stock market rebounded quickly after it fell steeply in March 2020 largely due to the timely and substantial fiscal and monetary policy intervention implemented by Governments around the world.

Although recovery was uneven and varied across regions, countries and sectors, the stock market surged about 55 per cent across the board, pricing in hopes of a strong economic recovery.

The markets priced in expectations of a strong economic recovery, given the substantial US fiscal stimulus plan and global rollout of vaccines, which resulted in bond yields rising over 1Q 2021.

Asset Mix	31 Mar 2019 (%)	31 Mar 2020 (%)	31 Mar 2021 (%)	Changes 2020 to 2021
Developed Market Equities	19	15	15	No change
Emerging Market Equities	18	15	17	+2%
Nominal Bonds and Cash	39	44	39	No change
Inflation-linked Bonds	5	6	6	No change
Real Estate	7	7	8	+1%
Private Equity	12	13	15	+2%
Total	100	100	100	100

For FY2020/2021 ending 31 March 2021, there was an increase in the weightage of emerging market equities, private equity and real estate.

This growth in private equity and real estate could be attributed to the increased deal activity and renewed asset performance over FY2020/21.

However, the weightage of nominal bonds and cash fell, in accordance with the market trends identified above.

This means that about half of its portfolio allocation consists of defensive assets like bonds and cash which are generally safer investments than equity.

3. GIC Portfolio’s Geographical Mix

However, the geographical mix of GIC’s portfolio allocation underwent some changes.

The weightage for investments in the United States and the Middle East, Africa & the Rest of Europe remained unchanged.

Whereas the weightage for the United Kingdom, Global (rest of world) saw smaller changes of about one to two percentage points.

The biggest movers were investments in the Eurozone, Japan and Asia excluding Japan.

Singapore’s sovereign wealth fund reiterated that asset allocation is the primary consideration when it constructs its portfolio.

Even though it does not allocate its assets by country, the sovereign wealth fund keeps track of its exposure to countries and makes sure that there is sufficient diversification of risk in its portfolio.

To contextualise GIC’s performance, we are benchmarking Singapore’s sovereign wealth fund to Norway’s Government Pension Fund Global — the biggest sovereign wealth fund in the world.

Although this is not a direct apple to apple comparison, it would be helpful to look at how GIC is performing compared to its peers.

The fund is also known as the Oil fund as it was set up in 1990 to reinvest the surplus revenues of the Norwegian petroleum sector.

The Norway Oil fund is the biggest sovereign wealth fund in the world.

Most of the Oil fund is invested in stocks/equity, which are ownership stakes in companies. Another part is invested in bonds, which are a type of loan to governments and companies, and a final portion is invested in real estate.

A few things to take note of:

• Sovereign wealth funds are state-owned investment funds or entities. Hence, at times, there is a need for a portion to be set aside from investments to benefit the country’s economy and its citizens.
• The type of investments for a sovereign wealth fund general depends quite a bit on what is an acceptable investment for a country. Hence, sovereign wealth funds’ investment boundaries differ from country to country.
• Sovereign wealth funds are fundamentally created to diversify the country’s revenue stream and act as an alternative form of return to further diversify certain risks that the country has. For example, if the country depends a lot on oil-exporting, a fund is necessary to reduce its reliance on it as its main source of revenue.
• The timeframe used to measure GIC and Norway’s Oil Fund is slightly different as Norway has yet to release its 2021 annual report.

With that in mind, let’s compare these two funds.

The Norway Oil fund has generated an annual time-weighted return of 6.3 per cent over a 22 year period between 1 January 1998 and the end of 2020.

After adjusting for the Norwegian government transferring of 3,092 billion kroner (S$665.22 billion) into the fund, the net annual return of the Norway Oil fund stands at 4.4 per cent

In comparison, GIC’s annualised real returns over a 20 year period between 31 Mar 2002 and 31 Mar 2021, stands at 4.3 per cent.

Make of it what you will.