GIC Singapore's Annualised Real Returns Drops to 2.7%: 4 Key Takeaways From the 2019/20 GIC Report
On Tuesday 28 Jul 2020, the Government of Singapore Investment Corporation (GIC) released its 2019/2020 GIC Report.
As the COVID-19 outbreak tears into global economies, the Singapore sovereign wealth fund reported its worst 20-year annualised real rate of return since 2009.
For the year ending 31 Mar 2020, GIC’s 20-year annualised nominal return on its portfolio was 4.6 per cent
After adjusting for the global inflation rate, the annualised 20-year real return this year stands at 2.7 per cent; down from 3.4 per cent last year.
This reported rate of returns was also the lowest since the Global Financial Crisis, where its annualised 20-year real return dropped to 2.6%.
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 2020
Despite a challenging global investment climate due to the fallout from COVID-19 and a drop in its annualised 20-year real return, GIC had already prepared beforehand to navigate this crisis by reducing its portfolio risk before the COVID-19 outbreak.
It has taken a more defensive stance with its portfolio allocation. But, the geographical mix of its portfolio remains largely unchanged.
As for the future, GIC has a store of ‘dry powder’ and is ready to take advantage of investment opportunities if it aligns with its values and investment strategy.
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 yardstick that GIC uses to measure its investment performance.
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.
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 in 2019 accounts for the years between 2000 to 2019.
Its 2020 returns account for the years between 2001 to 2020.
Its 2021 returns account for the years between 2002 to 2021 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 Drops to 2.7% in 2020
This leads me to the elephant in the room — GIC’s investment performance in 2020.
For the year ending 31 Mach 2020, the annualised 20-year real return of GIC’s portfolio was 2.7%, down from 3.4% last year.
This reported rate of returns was also the lowest since the Global Financial Crisis where its annualised 20-year real return dropped to 2.6%.
Do note that this net rate of returns accounts for the fund operating fees and expenses incurred in the management of its portfolio.
On balance, this is actually quite a decent return for an investment firm that has to contend with contributing to Singapore’s annual budget via the Net Investment Returns Contribution (NIRC).
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.
Despite the fallout from COVID-19, its portfolio remains resilient due to its defensive stance which we elaborate on further later in the article.
The dropoff can also be attributed to the exclusion of the very strong tech-bubble year return in the year 2000.
GIC CEO Lim Chow Kiat stated in the report that:
The reduction was largely due to the dropping out of a very strong tech-bubble year return 21 years ago, rather than the recent market moves.
Comparison With Norway’s Government Pension Fund Global Sovereign Wealth Fund
To contextualise GIC’s performance, we can compare Singapore’s sovereign wealth fund to Norway’s Government Pension Fund Global.
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:
- 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 countries to countries.
- 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 risk that the country has. 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 2020 annual report.
With that in mind, let’s compare these two funds. The Norway Oil fund has generated an annual time-weighted return of 6.1 per cent over a 21 year period between 1 January 1998 and the end of 2019.
After adjusting for the current global inflation rate and the fund operating fees and expenses, the annualised real returns of the Norway Oil fund stands at 4.2 per cent
In comparison, GIC’s annualised real returns over a 20 year period between 31 Mar 2001 and 31 Mar 2020, stands at 2.7 per cent.
Make of it what you will.
2. GIC Rebalanced of its Portfolio to Reduce Portfolio Risk Before COVID-19
While the COVID-19 crisis has exposed the fragility of the investment landscape, it turns out that GIC had already taken up a more defensive stance and reduced its portfolio risk before the COVID-19 outbreak.
This stance was adopted as it was concerned by the expensive valuation of assets and global events or conditions that slowed down the growth of economies around the world.
Thus, GIC for all intents and purposes rebalanced its portfolio of assets and adjusted the weightings of its assets by buying and selling assets in its portfolio.
Broadly speaking, GIC classifies the assets in its investment portfolio into six different categories as seen in the table below:
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
In line with its defensive stance, it reduced the proportion of the riskier Developed and Emerging Market Public equities by 4 per cent and 3 per cent respectively.
The proportion of Real Estate in its portfolio remained the same while it increased its stake of Private Equity slightly by 1 per cent.
It also increased the proportion of Nominal Bonds and Cash and Inflation-Linked Bonds by 5 per cent and 1 per cent respectively.
This means that about half of its portfolio allocation consists of defensive assets like bonds and cash which are generally safer investments than equity.
In the report, GIC CEO Mr Lim stated that taking up this defensive stance, it protected GIC’s investment portfolio from the “worst of the volatility” in the stock markets that occurred in the first quarter of the year.
Earlier this year in Mar 2020, we saw the global stock markets crash on Black Monday.
3. Portfolio’s Geographical Mix Remains Largely Unchanged
However, the geographical mix of GIC’s portfolio remained largely unchanged from 2019 to 2020.
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.
4. GIC Ready to Take Advantage of Investment Opportunities.
In a feature article, A Changing Global Investment Environment GIC stated that its priority was to contain the risk at the overall portfolio level.
When it comes to making investments, it will continue to invest based on its values of preparing and predicting as well as a focus on the long term.
In addition, they will also factor in their risk capacity, capabilities and constraints.
While it will continue to emphasise resilience and optionality, the Singapore sovereign wealth fund is prepared to take advantage of market volatility
In an interview with Bloomberg, both Mr Lim and Dr Jeffrey Jaensubhakij, GIC’s Chief Investment Officer said: “GIC has plenty of dry powder to make investments if it sees opportunities.”
Mr Lim added that GIC is now “poised to invest and seize opportunities that can enhance our long-term returns.”
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