Unraveling The Strategy Behind The GIC Portfolio

How does the GIC, Singapore’s sovereign wealth fund, invest it’s money?

It’s commonly known that the Singapore government relies on the MAS, GIC, and Temasek holdings to manage it’s national reserves.

These financial institutions act on the behalf of our government, and have different roles, investments, and risk profiles. They also have contrasting investment mandates as well.

While MAS functions as the central bank of Singapore, and Temasek Holdings as the state-owned investor, GIC handles most of the reserves and carries out it’s role as our sovereign wealth fund, in charge of preserving, and enhancing the purchasing power of Singapore’s reserves.

This implies that the GIC portfolio must be able to consistently achieve a certain degree of performance, while also being defensive enough to weather downturns and avoid catastrophic failure.

With it’s highly experienced human and intellectual capital, alongside a globally located research and investment team, it’s safe to say that the GIC is well-equipped and resourced to carry out it’s assigned mandate.

On that account, shrewd investors might be interested in scrutinizing the details of the GIC portfolio to understand it’s investment strategy, and glean valuable insights to aid in their own approach.

An Introduction

The GIC was formed in 1981, and is one of the three investment entities in Singapore that manage the Government’s reserves, alongside the Monetary Authority of Singapore (MAS) and Temasek Holdings.

At the time, the founding fathers of GIC recognized that the country had a growing surplus reserve which was sitting idly, and decided to establish the GIC to invest in longer-term, high-yielding assets instead.

Compared to the other two entities, GIC manages the majority of the Government’s financial assets in the capacity of a fund manager. It is a private company wholly owned by the Government of Singapore, and does not actually own the financial assets which it manages.

Today, the GIC is one of the largest sovereign wealth funds globally, managing an estimated total of US$740b worth of assets. They have been growing their footprint globally, and have diversified investments across many asset classes.

The Client’s Mandate

As the administrator of Singapore’s reserves, the GIC is tasked with preserving, and enhancing the purchasing power of the funds placed under their charge.

In layman terms, unlike some fund managers whose aim is to take on more risk to maximize profits, the goal of the GIC is to strike a balance between risk taking and investment yields.

This is done by investing in bonds, equities, and other mainstream asset classes to capitalize on their long term returns, while simultaneously beating inflation in the process.

In terms of risk profile, while the MAS and Temasek Holdings symbolize opposite ends of the risk spectrum, the GIC has traditionally been a fairly conservative investor with a globally diversified portfolio spread across various asset classes.

Such a strategy allows it to diversify it’s investments in order to protect itself, and also utilize correlations between different asset classes to drive returns during all market conditions.

Performance Metrics

As a performance metric, the GIC works with the annualized rolling 20-year real rate of return. This is basically the average portfolio return over a 20 year period, removing the impact of deposits and withdrawals in the calculation.

This approach is preferred as the time-weighted return clearly displays the fund manager’s ability to generate returns, and directly attributes the performance of the portfolio to the investment decisions made by GIC.

Furthermore, the “real rate” essentially shows the portfolio returns with the inflation rate subtracted from it. This is important as one of the requirements of the GIC portfolio is to at least generate a return above global inflation.

For the current 20 year period from 2001 to 2020, GIC has managed to attain an annualized 20-year real return of 4.3%, after accounting for inflation.

This is up from 2.7 per cent in the previous financial year, and the highest since 2015 when real returns hit 4.9%. For the past decade, real returns have been hovering around 3-4%.

Clearly for investors who are hungry for growth, this strategy might not be one to consider, yet we can’t dismiss the defensiveness and consistency of this portfolio.

The GIC Portfolio

The current GIC portfolio consists of the following components and instruments;

If we peruse the components carefully, we can see that the GIC portfolio consists of 45% in bonds and cash as a stable base, 8% in real estate investments to provide an inflationary hedge and exposure, and 47% in equity instruments with varying degrees of risk.

This is similar to the recommended 60/40 asset allocation strategy for most retail investors, with a slightly higher allocation to defensive sectors such as bonds and real estate.

It seems that the GIC prefers to err on the side of caution when it comes to portfolio management, which is likely because of it’s designated investment mandate and risk tolerance of the client.

The below image shows the geographic distribution of GIC’s investments.

The highest exposure comes from the United States, with Asia ex Japan taking second place. Remaining exposures are split between the other parts of the world.

Clearly management sees increased opportunities in these two areas, which is probably because of the large market cap and economic activity in the US, and huge population of Asia.

Two Halves Of A Whole

GIC’s assets are divided into two different portfolios, namely the Policy Portfolio and the Active Portfolio.

The Policy Portfolio represents the bulk of the reserves managed by GIC, and abides by the long term asset allocation strategy set by it’s fund managers.

This component aims to benefit from the long term benefits of asset growth, while also positioning itself to weather economic storms by investing in asset classes which counterbalance each other in different market environments.

The Policy Portfolio has a long investment horizon and is generally maintained through market cycles. GIC also conducts re-balancing on the portfolio from time to time, buying assets that have decreased in price and selling assets that have increased in price, in order to maintain it’s asset composition.

Management however, does not restrict themselves in tweaking their Policy Portfolio’s asset allocation temporarily, in response to opportunities in the markets.

The Active Portfolio on the other hand, represents the efforts of management to drive additional returns above and beyond passive “buy and hold” strategies for the overall portfolio.

This portfolio taps into the skills, knowledge, experiences, and competitive advantages of the investment teams to enhance returns for the GIC Portfolio.

Active strategies are generally funded by the sale of similar assets in the Policy Portfolio, so as to maintain the same level of systematic risk.

As a whole, the GIC Portfolio is constructed to be resilient across a broad range of possible market and economic conditions, while generating good returns above global inflation in the long term.

A Comprehensive Approach

The GIC’s investment process can be described as a comprehensive fundamental analysis strategy, also called a Top-down/Bottom-up approach by management.

The Top-down approach entails scrutinizing a country’s macroeconomics, politics, currency, and corporate governance culture, as well as sector fundamentals such as industry structure, drivers, and macro-trends.

Whereas the Bottom-up approach varies between asset classes, but typically involves commonly accepted factors such as it’s business model, competitive strengths, balance sheet, profitability, and management.

For assets such as fixed income instruments and real estate, management would consider factors such as credit worthiness, building quality, and income stream outlooks.

Ultimately, as a disciplined and long-term value investor, the GIC take a systematic, patient, and diversified approach in seeking investment opportunities globally.

Managing Risks

With such a critical role in the management of Singapore’s economic reserves, the GIC has developed a wide spectrum of risk management strategies to protect it’s assets, and it’s client’s reputation.

These are some of the guidelines which are more pertinent to retail investors;

  • Management of portfolio investment risk, making sure that risk taken is consistent with the prevailing mandate and proportional to expected returns.
  • Managing Information risk, ensuring that sources of knowledge and information are reliable, not compromised, and without discrimination.
  • Establishing the appropriate policies, guidelines, and control processes to reduce the likelihood of significant losses to assets.
  • Lastly, avoiding permanent impairment by preparing for short term volatility, diversifying, and accepting potential paper losses in the interim.

To End Off

Admittedly as retail investors, we don’t have the same amount of skill-sets, insights, and resources to work with when determining our investment allocation and strategy.

Therefore, we should consider tapping into the knowledge and data shared by institutions, and other more experienced investors to enhance and fine-tune our own investment approach.

By understanding our weaknesses and strengths, we can make rational and higher quality decisions which will influence our investment returns over the long term.

This in turn, will increase our overall return and success rate in investing, while simultaneously minimizing risk taken to only whatever is necessary.

Sources:

The GIC Homepage

The GIC Portfolio

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