GIC’s chief executive Lim Chow Kiat has warned that the profound uncertainty the fund faces is likely to continue to weigh on returns. – The Straits Times
SINGAPORE: Sovereign wealth fund GIC posted its weakest 20-year rolling returns in four years, on the back of lower returns in recent years and stubborn inflation.
GIC, one of three entities that contribute to Singapore’s reserves, reported a 3.9 per cent annualised rolling 20-year real rate of return for the financial year ended March 31, 2024. This figure factors in inflation. The latest rate of return, which spans April 2004 to March 2024, is down from 4.6 per cent in 2023, 4.2 per cent in 2022 and 4.3 per cent in 2021.
The annualised nominal return, which does not account for inflation, came in at 5.8 per cent in US dollar terms – reflecting how global inflation has chipped away at returns.
In July, the International Monetary Fund maintained its April forecast that global inflation is expected to decline steadily, from 6.8 per cent in 2023 to 5.9 per cent in 2024 and 4.5 per cent in 2025.
The nominal return of 5.8 per cent means that US$1 million invested with GIC in 2004 would have grown to roughly US$3.1 million (S$4.17 million) today.
The 2024 figures are the lowest in four years, when the annualised US dollar nominal rate of return over a 20-year rolling period as at end-March 2020 stood at 4.6 per cent, while the 20-year real rate of return was 2.7 per cent.
The group’s chief executive Lim Chow Kiat said in its annual report on Wednesday (July 24) that in the early 2000s, specifically around 2003 and 2004, there was exceptional recovery in equity markets after the dot.com crash.
But this particular period has dropped out of the rolling 20-year real return window.
“That exceptional year contrasted starkly with the lower returns of recent years due to weak returns in fixed income and global equities, particularly in emerging markets,” Lim said.
In his outlook, Lim said: “Uncertainty is a given for any investor, but events in the past few years intensified it to a profound level, challenging foundational assumptions of the past four decades.”
He noted that the world order is being reshaped, domestic politics in several large countries is in a state of flux, and the effects of climate change are becoming both more intense and unpredictable, even as rapid technological changes buffet societies.
“It is no longer sufficient for investors to only consider where we are in the macroeconomic cycle or the future path of interest rates. National security concerns, politically driven regulations, climate impacts and policy, and more must be part of the calculus,” Lim said, adding that the unprecedented uncertainty translates into a wider range of possible outcomes.
He cautioned in a briefing on July 23 that the profound uncertainty the fund faces is likely to continue to weigh on returns. Lim said that amid the volatility, the fund has to play to its strengths and seize new opportunities.
“One example is climate transition. We saw an opportunity to leverage our long-term, flexible capital – one of GIC’s key strengths – to bridge a funding gap for climate technologies such as green steel and battery storage, where companies often find themselves caught between traditional buckets of capital,” he said.
Lim noted that these firms need long-term capital to grow but are too mature for venture and growth equity, and also lack the track record to attract infrastructure funding.
The fund has also set up an investment programme for green assets in 2024, following green shoots in the sustainability solutions group in the private equity department, investing in climate technologies.
Over the past years, GIC said, it has been diversifying on a far more granular level to enhance the resilience of the total portfolio, including stepping up investments in infrastructure and real estate.
For instance, in real estate, the fund is looking at what opportunities there are in China.
When asked how its investments in China have done compared with other regions, the group’s chief investment officer Jeffrey Jaensubhakij said at the briefing that GIC’s returns are not that different from what other investors can get in the market, given that the fund is a large investor.
“Through the long term, it has been fine. In the last few years, because of the changes in both the Chinese economy and investment environment itself, then relative to where you invest in the rest of the world, it hasn’t performed as well,” he said.
But Jaensubhakij noted that within what the group has chosen, be it private equity or real estate, GIC has been in sectors that have outperformed the market in general.
When asked how GIC sources deals, Lim said the majority of the investments made are through intermediaries and long-term partners such as banks, fund managers and family offices.
Increasingly, the fund is sourcing its own deals as well, he added.
“We have now more local presence around the world. We have 10 offices outside of Singapore that allow us to build local expertise, that allow us to expand our partnerships with the best players in each sector, so that’s quite an advantage I would say,” Lim said.
He added that new deals done by the fund will have to meet a higher bar.
The fund measures its performance by evaluating returns over a 20-year period, which is in line with its mandate to preserve and enhance the international purchasing power of the reserves over the long term.
GIC’s expected long-term returns are used to calculate the annual Net Investment Returns Contribution (NIRC), which is derived from up to 50 per cent of the investment returns from the Monetary Authority of Singapore, GIC and Singapore’s investment company Temasek.
It is a significant contributor to the Singapore Government’s budget.
The NIRC is an estimated S$23.5 billion in 2024. – The Straits Times/ANN
