GIC
A US$200b question
With the world market turmoil, Singaporeans - shareholders of the state funds - deserve some quick, clear answers about the disparity. By Seah Chiang Nee
Sep 24, 2008

In its first such report, The Government Investment Corporation (GIC) has thrown more light on its investments, but not the exact size of portfolio or how its investments fared during the past year of market turmoil.

On asset under its management, the report merely said that the Corporation manages well over $100b (all figures in US DOLLAR), a figure that analysts note it had been saying since the year 2000.

This is a surprise since (as TODAY newspaper pointed out) Morgan Stanley had estimated it to be closer to US$300b before the recent global markets meltdown.

Between this and the current report of more thasn $100b is a vast difference. There may be an explanation for it. GIC regularly moves funds in and out that changes its asset.

However, given the nervousness in the market, GIC owes it to its 'shareholders' - the people of Singapore - to offer a clearer picture about its investments in the volatile market. This disparity will cause more anxiety. Singaporeans worry about their savings.

They need an explanation why there is a $200b disparity. The buzz will likely continue until it is resolved - both here and abroad.

The following is an analysis by Rachel Ziemba, RWE Monitor: -

(The GIC report) .. does have one glaring exception - no information on the size of its assets under management except to reiterate that it manages well over $100 billion (a statement that it has made since at least the year 2000).

It does, however, confirm key information on its asset allocation (a shift to alternatives) and fairly significant exposure to emerging markets, two trends that seems likely to continue. And it is significant that this information comes directly from the fund and not through the intermediary of the media.

GIC invests a portion of Singapore’s reserves, its fiscal surpluses and Singapore’s mandatory retirement contributions. It does not disclose its assets except to say that they are well over $100b and that it aims to beat G3 inflation, which it did in the first 25 years of its history (to 2006).

Size of fund: Estimates of its size vary from FT$140b to over $300b. Based on information previously disclosed and market returns - a plausible estimate is $220b.

This assumes index-based returns and that GIC received transfers equal to the increase in official portfolio investments in Singapore's balance of payments.

Using index based gains and losses would imply fairly hefty losses on GIC's hedge fund, equity and real estate holdings.

Brad Setser and I have estimated that GIC’s assets under management were over $200 billion at the end of 2007.

GIC’s equity and fixed income investments are likely roughly equivalent to Singapore’s reported “portfolio investment” in the Net International Investment Position ($150b in 2006, the latest available data).

Accounting for the approximately 20% of GIC’s portfolio in real estate and other alternative investments would bring the total closer to $200b though.

A few caveats about this data: Net portfolio investment may also include private investments which would lower GIC’s assets. Alternatively GIC may manage a share of Singapore’s reserves (MAS assets)– which are reported separately in the NIIP.

Inflows: Singapore does not report transfers to GIC, but reported official portfolio investments in the balance of payments seem to be a good proxy.

The cumulative increase in official portfolio investments exceeded $30 billion from 2001 to 2006 ($7.5 billion in 2006) and over reach $9b in 2007. Other official investments (likely including holdings of Temasek and state banks) are reported separately.

Asset allocation: GIC has been increasing its exposure to alternative investments. In 2008, equities made up 44% of its portfolio (34% developed markets and 10% EM), investments in alternative assets such as private equity and real estate rose to 23%, around 26% were in bonds (6% inflation-linked) and 7% in Cash (all March 31 2008).

In 2006, GIC’s asset allocation was thought to be 50%, 30% bonds, and 20% alternatives (private equity, property and commodities). It has disclosed holdings in 50 hedge funds, mostly Asia-based.

Strategy: GIC has been primarily a portfolio investor though it does take some large stakes, particularly in Asia.

As with some other funds, GIC's stakes have taken on more prominence recently and include $6.88b in Merrill Lynch, $9b in UBS, $1.5b in Italy’s Sintonia (the Benetton family holding company) and several property joint ventures in Europe and Asia. It was rumoured to be the lead investor in a new TPG fund.

As a result, some analysts have suggested that the line between GIC and Temasek, Singapore’s direct investment arm, which holds its stakes in companies in Singapore and abroad, maybe narrowing.

In fact, GIC may have been hoped to increase its returns - Temasek has returns of well over 18% from its holdings.

Yet at present, GIC's stakes are much smaller than those of Temasek and all are far below controlling levels. Furthermore it declined the offer of a board seat offered by UBS, though it may exercise its voting stake in other cases.

Currency Composition: Since 2000, when US, EU and Japanese holdings dominated, GIC has reduced its dollar share and increased exposure to Emerging markets.

As of March 31 2008, 80% of its investments remain in the US, EU and Japan. However, despite that, GIC may still have among the highest exposure to emerging markets among sovereign funds.

About 12% of its portfolio has been invested in Emerging Asia (4% in China/HK) and 2% each in Korea and Taiwan) and it also has investments in Latin America - Though the 6% "other Americas" investment likely also includes at least 2% invested in Canada.

Over the same period,Temasek has increased its holdings in AXJ which now make up 40% of the total portfolio – Assets in Singapore account for another 40% and OECD countries the remaining 20%.

Returns/Benchmarks: GIC’s stated goal is to achieve returns exceeding G3 inflation, which it claims to have done since inception in 1981.

In 2006, GIC announced that its annual return averaged 9.5% in US dollar terms for the 25 years ending March 2006 or 5.3% above G3 inflation.

In 2008 it suggested that its average annual return was 7.8% for the previous 20 years, and a chart of its real and nominal return suggests lower not higher real returns in recent years as the Asian crisis, tech bust and credit crisis weighed on returns.

GIC also claims to have exceeded the return on its benchmarks including the MSCI World Equity index and Lehman Brothers World Bond Index. It did so in the last 20 years - the MSCI global brought 7%.

Governance: GIC’s board, called the “inner council” of Singapore’s government, approves the overall asset allocation, strategy and benchmarks to meet. GIC officials reportedly choose the countries and sectors in which funds are to be invested within those asset allocations.

Singapore’s president receives the reports produced by Singapore’s auditor general. More details on governance are available in the recent report (September 2008) Both the Monetary Authority of Singapore (MAS) and GIC have entrusted funds to external managers to develop Singapore’s asset management industry.

About 1/3 of GIC’s assets are entrusted to external managers. This means that Singapore likely outsources a higher share than Norway's fund (around 20%) but a much lower share than the Abu Dhabi Investment Authority reports.

GIC has been one of few sovereign funds to suggest that it might increase disclosure as part of ongoing IMF SWF code of conduct discussions.

Its first step was to release a report September 2008, disclosing more about its investment process and its asset allocation. While much of the information was already available in the press, this brought it together in one document.

In this report - there is one glaring exception. No information on the size of Singapore's assets under management. GIC repeated the oft-stated figure that it manages well over $100 billion.

Given that it has said so for almost a decade, its assets under management may well be much larger. Temasek already provides significant details about its assets and has done so for the last few years and has a AAA credit rating – as noted in the recent testimony before a US Financial services subcommittee hearing.

Starting in December, GIC’s manager suggested that it might increase disclosure on relations with the government, internal governance, risk control and overall strategy – many of the areas that the EU mentioned in its suggested code of conduct.

So what motivates this? – Today’s Kenneth Chang suggests it is prudence – and an opportunity to differentiate itself from other funds.

It does seem that this is an opportunity for GIC to set some of the boundaries. And disclosing information could open more doors to investment and avoid onerous regulation.

Singapore’s own population - who have raised some concerns about the over $20 billion invested in UBS, Citi and Merrill by GIC and Temasek – might appreciate knowing more about where the state invests its money.

http://www.rgemonitor.com/econo-monitor/249284/swf_watch_government_of_singapore_investment_corporation_gic