2019/20 Report on the Management of the Government's Portfolio - GIC

 
2019/20 Report on the Management of the Government's Portfolio - GIC
Report on the
Management of the
Government’s
Portfolio

2019/20
2019/20 Report on the Management of the Government's Portfolio - GIC
Contents                                                                                                                                    2

1          Overview                 1.1   Letter from the CEO                                                                            05
                                    1.2   The GIC Primer                                                                                 11

2          Investment Report        2.1   Overview: Long-term Investment Performance                                                     13
                                    2.2   The GIC Portfolio                                                                              16
                                    2.3   Intermediate Markers of Investment Performance                                                 18

3          Managing the Portfolio   3.1   Overview: Our Portfolio and How We Manage It                                                  24
                                    3.2   Building the Portfolio                                                                        25
                                    3.3   Investment Process                                                                            31
                                    3.4   Navigating Thematic Changes                                                                   32
                                    3.5   Investment Implementation                                                                     37
                                    3.6   Managing Risks                                                                                40

4          Feature Article                A Changing Global Investment Environment                                                       49

                                                                   Report on the Management of the Government’s Portfolio for the Year 2019/20
2019/20 Report on the Management of the Government's Portfolio - GIC
Contents                                                                                                                          3

5          Governance   5.1   Governance Overview                                                                              58
                        5.2   GIC Board, Board Committees and Management Committees                                            63
                        5.3   Organizational Structure                                                                         65
                        5.4   Board, Board Committee Members and Advisors                                                      66

                        5.5   Executive Management                                                                             73

6          Our People   6.1   Our People and Values                                                                           78
                        6.2   Our Offices                                                                                     83

                                                         Report on the Management of the Government’s Portfolio for the Year 2019/20
2019/20 Report on the Management of the Government's Portfolio - GIC
1
Letter from the
Chief Executive Officer

1                 2            3               4                 5            6
Letter from the   Investment   Managing        Feature Article   Governance   Our People
Chief Executive   Report       the Portfolio
Officer
2019/20 Report on the Management of the Government's Portfolio - GIC
1 Overview                                                                                                                                        5

1.1   Letter from
      the Chief Executive Officer
      Dear Stakeholders,

      These are extraordinary times. We are
      at the confluence of a public health,
      economic, and financial crisis. We have   The COVID-19 pandemic
      seen extraordinary developments
      and swift responses, including drastic
                                                was unforeseen, but it
      mobility restrictions, draconian public   catalysed this global
      health measures, record fiscal and
      monetary stimulus, urgent steps by        recession. It has accentuated
      businesses to conserve cash, and
      wild financial market movements.
                                                vulnerabilities in the
      Navigating the turbulent
                                                investment environment
      environment with caution                  we had highlighted before,
      and resilience
                                                including high asset prices,
      Despite the turbulence, GIC’s
      portfolio performance has remained
                                                weakening fundamentals,
      resilient. This year, the 20-year         limited policy room, and
      annualised USD nominal return of
      our portfolio was 4.6%. Adjusting for     growing geopolitical
      global inflation, the annualised 20-
      year real return was 2.7%, down from
                                                uncertainties.
      3.4% last year. The reduction was
      largely due to the dropping out of a
      very strong tech-bubble year return       Lim Chow Kiat
      21 years ago, rather than the recent      Chief Executive Officer, GIC
      market moves.

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1 Overview                              1.1 Letter from the Chief Executive Officer                                                                                          6

         The COVID-19 pandemic was               long-term real return. This has been          of Singaporeans with large public
         unforeseen, but it catalysed this       the case particularly over the last           debt, and is an important buffer for
         global recession. It has accentuated    five years. We now stand poised to            a country with no natural resources.
         vulnerabilities in the investment       invest and seize opportunities that           It is also possible only because of
         environment highlighted in our past     can enhance our long-term returns.            the foresight of our founding fathers
         annual reports. Prior to this crisis,                                                 and consistent prudence on the part
         GIC had concerns over high asset        Our role as custodian of                      of our government and people. The
         prices, weakening fundamentals,         the nation’s reserves                         draw on reserves can only be taken in
         limited policy room, and growing                                                      extraordinary circumstances by the
         geopolitical uncertainties. These       In these difficult times, we are even         government with the approval of the
         conditions could have significantly     more mindful that the reserves                Elected President.
         and permanently impaired our            entrusted to GIC are a key resource
         portfolio. Fortunately, we had pre-     for Singapore. This year, with                COVID-19 will not be the last crisis
         emptively de-risked by reducing         Singapore expected to experience              that Singapore faces. Looking ahead,
                                                                                                                                                            2
         our allocation to equities in favour    a deep recession2, the Government             with growing societal needs and                              Source: Ministry of
         of cash, and evaluating investment      rolled out four relief packages totalling     climate change adaptation measures                           Trade and Industry,
                                                                                                                                                            Government of
         transactions with more caution.         S$93 billion to support households,           adding to the country’s expenditure,                         Singapore
                                                 workers, and businesses. This required        our reserves will continue to be a vital
                                                                                               revenue source for the government
We now stand poised to
                                                 an extraordinary draw of S$52 billion                                                                      3
                                                 from past reserves, in addition to            through the NIRC. GIC must continue                          The NIRC comprises
                                                                                                                                                            up to 50% of the net
invest and seize opportunities                   the annual Net Investment Returns
                                                 Contribution (NIRC)3, estimated at
                                                                                               to protect and enhance the reserves
                                                                                               under our management.
                                                                                                                                                            investment return from
                                                                                                                                                            the reserves under

that can enhance our long-
                                                                                                                                                            management by GIC,
                                                 S$18 billion for FY2020. Before this,                                                                      Monetary Authority
                                                                                                                                                            of Singapore and
                                                 Singapore has only drawn on past              Facing a changing global
term returns.
                                                                                                                                                            Temasek, and up to 50%
                                                 reserves once, for the 2008 Global            investment environment                                       of the net investment
                                                                                                                                                            income derived from
                                                 Financial Crisis (GFC). The S$52 billion                                                                   past reserves from the
                                                                                                                                                            remaining assets. It
         This defensive position has helped      expected to be drawn this year is more        The global investment outlook, with                          is the single largest
                                                                                                                                                            revenue source for the
         cushion our portfolio from the worst    than ten times the amount that was            the wide range of potential outcomes                         Government.
         of the volatility1 in the financial     last drawn for the GFC.                       and downside risks, has become even
         markets in the first quarter of                                                       more challenging. In addition to the
                                                                                                                                                            1
         2020. GIC’s portfolio returns have      Singapore’s ability to tap its national       pandemic unknowns, such as the                               The global equity
                                                                                                                                                            markets fell by over 20%
         consistently been less volatile than    reserves in times of crisis is a              possibility of subsequent waves of                           in 1Q 2020, its worst
         our risk reference portfolio whilst     significant strategic advantage. This         infection, other pre-existing problems                       quarterly performance
                                                                                                                                                            since the GFC. Source:
         providing a creditable, sustained       avoids burdening future generations           have been accentuated. These include                         MSCI World Index.

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1 Overview                                1.1 Letter from the Chief Executive Officer                                                                                          7

fundamental issues such as poor
productivity growth, weakened
                                          We are likely to see a reconfiguration
social compacts, high debt burden,        of Asian economies’ links to the world.
and rising geopolitical tensions.
                                          Over the long term, intraregional trade
The pandemic has accelerated
several shifts that could shape           should strengthen in Asia.
the investment landscape.
                                          content digitalisation. Modularisation        diversification of global supply chains
First, uncharted policymaking.            and duplication of supply chains              away from China. Over the long
Governments and central banks are         will become more widespread.                  term, intraregional trade should still
resorting to unconventional policies      To further protect domestic                   strengthen in Asia, as companies seek
of large magnitudes to support their      interests, governments could also             to produce where most of the world’s
economies. With global interest rates     tighten restrictions on foreign               consumers are4.                                              4
                                                                                                                                                     It is estimated that 40%
at 140-year lows, growing political       labour and capital. A major retreat                                                                        of global consumption
                                                                                                                                                     will take place in Asia by
divides, and corporate and public         from globalisation is likely to hurt          Third, governance will matter more.                          2040.
debt levels set to climb even higher,     global productivity growth and be             With the global recession, public                            Source: Asia’s Future Is
                                                                                                                                                     Now Report, McKinsey
it will be very difficult to calibrate    particularly detrimental to emerging          health challenges and geopolitical                           (July 2019)
or withdraw these massive stimulus        markets that have historically                tensions, the preparedness and
measures as the economy recovers.         relied on foreign investments and             responsiveness of governments,
This introduces policy risks for          export-led growth.                            countries’ relevance to global supply
inflation and currencies that investors                                                 chains, and their ability to retain the
have not had to contend with in           In particular, we are likely to see a         trust of their populations will be key
recent history.                           reconfiguration of Asian economies’           drivers of their performance.
                                          links to the world. The pandemic has
Second, headwinds to globalisation.       added pressure to the already strained        Fourth, industry consolidation will be
The commitment of major countries         US-China relations. Potentially tighter       catalysed. COVID-19 has drastically
to globalisation has diminished. The      restrictions on China with regard to          weakened the finances of many
COVID-19 crisis has also sped up the      trade, technology, and capital will           companies, particularly small- to
push to diversify or re-shore supply      affect the rest of Asia. However,             medium-sized ones. Given the depth
chains, increase domestic production      certain markets, given their lower            and duration of this crisis, many will
of certain essential goods, and           production costs, comprehensive               not survive while others will require
adopt technology such as advanced         supplier ecosystems or large domestic         additional funding, seek alliances or
robotics, additive manufacturing, and     markets, could also benefit from the          be acquired. Companies with stronger

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1 Overview                                1.1 Letter from the Chief Executive Officer                                                                                          8

balance sheets and technological          This means emphasising fundamental            operations across the world. GIC’s
edge are likely to become bigger          trends over market sentiments,                Business Continuity Programme
and stronger.                             value over price, and partnerships            includes a detailed response plan for
                                          over transactions.                            infectious disease outbreak, which
Adding to the profound uncertainty                                                      was adapted and improved from our
is the challenge of high valuations.      Lastly, we reaffirm our focus on              experience in SARS. This, together
Recent policy stimulus has lifted asset   sustainability. We believe climate            with our continuous investment in
prices to levels where investors risk     change and other sustainability               technological solutions, allowed us to
overpaying and suffering permanent        risks will greatly affect the physical        respond to the COVID-19 pandemic
impairment. Given our mandate, the        environment and capital markets,              effectively, including the rapid roll-out
first order of business is to reduce      which in turn will influence the              of safety measures and large-scale
this risk by keeping a cautious stance    long-term value of our investments.           telecommuting.
on the broad markets. At the same         Therefore, sustainability is an essential
time, with structural shifts and
likely episodic market volatility, we
                                          part of our investment strategy, risk
                                          management, and corporate culture
                                                                                        Amidst the uncertainty,
are prepared to deploy capital into       and processes. We are focused                 we should maintain our
individual opportunities. You can read    on supporting “transition”, where
more on this in our Feature Article,      businesses are taking actions to              focus on our mandate, values,
“A Changing Global Investment
Environment”.
                                          improve sustainability. We share more
                                          on our sustainability approach in the
                                                                                        risk capacity, capabilities,
                                          “Managing the Portfolio” section.             and constraints.
Focusing on our values
and strengths                             Building a strong and                         This year, we appointed Mr Choo
                                          resilient organization                        Yong Cheen, Ms Liew Tzu Mi, and Mr
Amidst the uncertainty, we should                                                       Bryan Yeo to our Group Executive
maintain our focus on our mandate,        Organizational resilience is                  Committee (GEC), where they took
values, risk capacity, capabilities,      fundamental to GIC’s investment               on formal responsibilities at the
and constraints.                          mandate and purpose, and enables us           enterprise level, whilst remaining as
                                          to sustain performance, particularly          the Chief Investment Officers for
We continue to follow the principle,      through times of crisis. Our resilience       Private Equity, Fixed Income, and
“Prepare, not Predict” and emphasise      was tested during the COVID-19                Public Equities respectively. We also
portfolio diversification and, where      pandemic, which not only posed                congratulate Mr Jin Yuen Yee who
appropriate, optionality. We should       risk to the health and safety of our          succeeded Dr Chia Tai Tee as GIC’s
maintain a long-term perspective.         staff, but also curtailed GIC’s office        Chief Risk Officer and a member

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1 Overview                                1.1 Letter from the Chief Executive Officer                                                                                          9

of the GEC. Having these four new         on to serve the community after               to great lengths to safeguard our
GEC members is part of our ongoing        graduating from the programme. This           portfolio and support one another,
process to ensure a strong bench of       year, we also started GIC X Change, a         despite a highly stressful work and
current and future leaders for GIC.       mentorship and volunteering scheme            living situation. Likewise, I wish to
                                          which matches GICians and youths              thank our Board and partners for their
I would like to express my deep           to jointly develop community service          continued support and trust during
gratitude to Tai Tee for his many         projects for long-term impact.                these difficult times.
years of service and contributions
to GIC. His strong emphasis on taking     More recently, in response to                 Being prepared
risks that are compensated, informed,     COVID-19, GIC embarked on a dollar-
and authorised has strengthened           for-dollar matching donation drive,           We have been preparing for a
our risk culture, and enabled careful     supported numerous ground-up                  challenging investment environment
expansion and innovation into new         community projects led by our staff,          for some time and our defensive
investment areas.                         and contributed funds to relief efforts       position has helped in navigating the
                                                                                        current turmoil. We remain vigilant,
                                                                                        guided by our mandate, values, and
Externally, we continue to build on our                                                 investment principles. We are ready
                                                                                        to face an uncharted future, and will
engagement efforts not only with our                                                    continue to invest the nation’s foreign

partners, but also the local communities.                                               reserves prudently.

Externally, we continue to build on       in Asia, the US, and Europe. As the
our engagement efforts not only           manager of Singapore’s reserves,
with our partners, but also the local     GIC wants to do our part to help
communities. For example, GIC             vulnerable communities.
Sparks and Smiles, our leadership and
community engagement programme            I would also like to convey my deep
for students from disadvantaged           appreciation to our staff across our
households, turns five this year. Since   global offices. Their resilience and
its launch, over 650 students have        dedication have enabled GIC to deliver
volunteered some 17,000 hours to          sustained long-term real returns and
mentor children and youth. I am           manage the considerable disruption                                                            Lim Chow Kiat
heartened that many have gone             in our operations. They have gone                                                   Chief Executive Officer, GIC

                                                                                                      Report on the Management of the Government’s Portfolio for the Year 2019/20
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1 Overview   1.1 Letter from the Chief Executive Officer                                                                                   10

Welcome                                                                        Senior Leadership
                                                                               Appointments and Renewals

                                                                               On 1 April 2020,
                Mr Glenn Hutchins was appointed to our
                                                                               we welcomed four new appointments
                International Advisory Board on 1 April 2020.
                                                                               to the Group Executive Committee:

                He is concurrently an advisor to the Investment
                Strategies Committee and a member of the                       Mr Jin Yuen Yee,
                Investment Board.                                              who assumed the role of
                                                                               Chief Risk Officer
                Mr Hutchins is Chairman of North Island
                and co-founder of Silver Lake.
                                                                               Mr Choo Yong Cheen,
                                                                               who continues to serve as Chief
                                                                               Investment Officer for Private Equity

Thank You                                                                      Ms Liew Tzu Mi,
                                                                               who continues to serve as Chief
                                                                               Investment Officer for Fixed Income

                It has been our privilege to have benefitted from
                the experience and expertise of Mr David Denison,              Mr Bryan Yeo,
                who stepped down in April 2020 after seven                     who continues to serve as Chief
                years of service on the GIC Investment Strategies              Investment Officer for Public Equities
                Committee and Investment Board.

                                                                               For years of dedicated service,
                                                                               we thank:

                                                                               Dr Chia Tai Tee,
                                                                               who retired as Chief Risk Officer

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1 Overview                                                                                                                                                  11

1.2                                            P
                                                   PRUDENCE We exercise prudence and sound
                                                   judgement, and take a considered approach
                                                   to managing risks as we seek to deliver good
                                                   investment returns, always conscious of our
                                                                                                       As an institution and as individuals, we conduct
                                                                                                       ourselves with good sense and circumspection,
                                                                                                       even as we take the best advantage of our large
                                                                                                       asset base, global presence, multi-asset approach,
                                                   overriding fiduciary responsibility.                and long-term orientation.

The
GIC Primer
                                               R
                                                   RESPECT All of us are united in a common            behaviour that works against the interest of our
                                                   endeavour, regardless of who we are,                Client or of GIC. We stress teamwork within and
                                                   where we work or what we do. We respect             across departments, and with our Client and
Our mission is to preserve and enhance the
                                                   people as individuals, care for their well-         business partners. We expect everyone to be
long-term international purchasing power of
                                                   being, and welcome diversity in capability          free, candid, and constructive in their comments
the reserves placed under our management.
                                                   and background. We do not tolerate any              and suggestions, and always seek to help our
People and talent are central to what we can
                                                                                                       colleagues and GIC do better.
do. We believe that the results we seek are
best achieved through a culture founded on

                                               I
our five PRIME values of Prudence, Respect,        INTEGRITY Everything we do is founded on            by the laws of the countries we invest in, and
Integrity, Merit, and Excellence.                  integrity. We expect the highest standards of       observing our code of ethics in letter and in spirit.
                                                   honesty from everyone in GIC, both in our work      We must never jeopardise the trust others have in
                                                   and in our personal lives. This includes abiding    us and in our reputation for professionalism.

                                               M
                                                   MERIT We recruit and develop our people             our people to achieve their potential so that we may
                                                   solely on merit. We draw our talent from            also perform to our potential. We select business
                                                   around the world and provide challenging and        partners based on their capability. We believe in
                                                   meaningful work. We grant recognition and           long-term relationships built upon high levels of
                                                   reward based on performance and conduct             performance and quality of service.
                                                   consistent with our PRIME values. We develop

                                               E
                                                   EXCELLENCE We are relentless in our pursuit         pursuing improvements where they may be found,
                                                   of excellence. In all that we do, we strive to be   and economies where these may be gained. We
                                                   the best that we can be. This demands that we       expect everyone to do their best in every situation.
                                                   plan and anticipate well, so that we will always    We harness the creativity and imagination of our
                                                   be in time for the future, fully able to take up    people and our business partners for superior
                                                   the challenges and opportunities that come,         results.

                                                                                                          Report on the Management of the Government’s Portfolio for the Year 2019/20
2
Investment Report
GIC’s mandate is to achieve good long-term
returns above global inflation, and preserve and
enhance the international purchasing power of
the reserves placed under our management.

1                 2             3               4                 5            6
Letter from the   Investment    Managing        Feature Article   Governance   Our People
Chief Executive   Report        the Portfolio
Officer
2 Investment Report                                                                                                                                                                    13

2.1   Overview:
      Long-term Investment Performance
      GIC’s mandate is to preserve and               This year, the 20-year annualised real           high valuations, which could result in
      enhance the international purchasing           return (i.e. the return above global             large permanent portfolio impairment.
      power of the reserves under our                inflation) fell to 2.7%, largely due to a        The first order of business was to
      management over the long term,                 very strong tech-bubble year return              reduce our exposures to such a
      that is, to achieve good long-term             in FY1999/2000 dropping out of this              risk. While we had not expected
      returns over global inflation. This is         20-year window, and to a lesser extent,          a pandemic to be the catalyst for
      represented by the primary metric              the drawdown of global markets over              this global downturn, our efforts to
      for evaluating GIC’s investment                the last year (see next page).                   diversify and reduce our portfolio
      performance – the rolling 20-year                                                               risk have enabled us to cushion its
      real rate of return.                           In recent years, we have been                    impact and better navigate the market
                                                     concerned about high uncertainty and             turmoil brought on by COVID-19. We
                                                                                                      describe this approach in this section.

      Figure 1: Annualised rolling 20-year real rate of return of the GIC Portfolio since 2001

      %

      6

      4

      2

      0
          2001

                 2002

                        2003

                               2004

                                      2005

                                             2006

                                                    2007

                                                           2008

                                                                  2009

                                                                         2010

                                                                                2011

                                                                                       2012

                                                                                              2013

                                                                                                     2014

                                                                                                            2015

                                                                                                                   2016

                                                                                                                            2017

                                                                                                                                      2018

                                                                                                                                                2019

                                                                                                                                                          2020
           Year ended 31 March

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2 Investment Report                 2.1 Overview: Long-term Investment Performance                                                                                      14

Understanding                                                                 GIC reports its performance as an               The return figure is a rolling return,
                                                                              annualised 20-year real return, which           which means that last year’s 20-year
the Rolling                                                                   is the average time-weighted portfolio          return spans the period 2000 to 2019,

20-Year Return                                                                return over that period. A time-weighted
                                                                              return helps to eliminate the distorting
                                                                                                                              this year’s 20-year return spans 2001
                                                                                                                              to 2020, and next year’s return will
                                                                              effects on growth rates created by              span 2002 to 2021. For each new year
                                                                              inflows and outflows of money to and            added, the earliest year drops out of the
                                                                              from the portfolio.                             measurement window. The change in
                                                                                                                              this rolling return figure is therefore
                                                                                                                              determined by the returns from the
                                                                                                                              earliest year that drops out and the
                                                                                                                              latest year that is added.

Figure 2: Illustration of a portfolio’s rolling 20-year return

                                                                                           20-year            20-year                  20-year                   20-year
                                                                                           return             return                   return                    return
                                                                                           in 2017            in 2018                  in 2019                   in 2020

 1998                                                                                                  2017

               1999                                                                                                          2018

                                 2000                                                                                                                   2019

                                            2001                                                                                                                                   2020

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2 Investment Report                        2.1 Overview: Long-term Investment Performance                                                                          15

Over the long term, GIC’s                  diversified portfolio approach, and
performance is largely driven by the       in particular, our cautious stance in
dynamics of the global economy and         recent years. As highlighted in past
our Policy Portfolio, which reflects our   reports1, GIC had grown increasingly                                                            1
                                                                                                                                           GIC’s past reports are
asset allocation strategy. Skill-based     concerned about high asset valuations                                                           available here:
                                                                                                                                           www.gic.com.sg/reports/
active strategies undertaken by our        and high uncertainty, and had
investment teams seek to add returns       therefore reduced our portfolio risk.
above market benchmarks. We strive
to achieve the best possible long-term
returns for the GIC Portfolio across
a broad range of economic scenarios,
within the risk parameters set by the
Client. This is described in greater
detail in the chapter on “Managing
the Portfolio”.

Over the long term, GIC’s performance is largely
driven by the dynamics of the global economy
and our Policy Portfolio, which reflects our asset
allocation strategy.
In the first quarter of 2020, the
global equity markets fell sharply as
economic growth plunged, following
severe disruptions from the COVID-19
outbreak. However, the impact on
GIC’s portfolio was cushioned by our

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2 Investment Report                                                                                                                                   16

2.2   The GIC
      Portfolio

      In line with the decline in equity
                                                 Table 1: Asset mix of the GIC Portfolio
      markets, the proportion of developed
      and emerging market public equities
      in the GIC Portfolio fell, while private     Asset Mix                        31 March 2020 (%)                     31 March 2019 (%)
      asset allocation grew as a percentage
      of the portfolio. The share of bonds
      and cash rose as these lower risk            Developed Market Equities        15                                    19
      assets benefitted from the flight to
      safety. There was little change in terms     Emerging Market Equities         15                                    18
      of geographical mix. Table 1 and Figure
      3 show the asset mix and geographical        Nominal Bonds and Cash           44                                    39
      distribution of the GIC Portfolio as of
      31 March 2020.
                                                   Inflation-linked Bonds           6                                     5

                                                   Real Estate                      7                                     7

                                                   Private Equity                   13                                    12

                                                   Total                            100                                   100

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2 Investment Report                    2.2 The GIC Portfolio                                                                                             17

Figure 3: Geographical distribution of the GIC Portfolio

                                                                                                                  GIC’s
                                                                                                                  Portfolio Mix
                                                                        13%               19%
                                                                        Eurozone          Asia ex Japan
                                                                                                                  The GIC Portfolio comprises a well-
                                                                                                                  diversified portfolio, with each asset class
                                                                                                                  having a different risk-return profile. For
                                                                                                                  example, growth assets such as public
                                                                                                                  and private equities generate higher
                                                                                                                  returns but are riskier. Defensive assets
                                                                                                                  such as sovereign bonds offer lower
                                                                                                                  returns but have lower risk and protect
                                            6%                                                                    the portfolio in market downturns. Real
                                            United                                                                estate and infrastructure offer stable,
                                            Kingdom
                                                                                                                  long-term, income-oriented returns, but
                                                                                                   13%            have higher illiquidity risks than public

34%                                                                                                 Japan         equities and bonds.

United States
                                                                                                                  The GIC Portfolio is constructed to be
                                                                                                                  resilient across a broad range of possible

                2%                                5%
                                                                                                                  market and economic conditions, while

                Latin
                America
                                                  Middle East,
                                                                              8%                                  generating positive long-term real
                                                                                                                  returns. Asset allocation is our primary
                                                  Africa, and                 Rest of
                                                  the rest of                 the World                           focus in portfolio construction. While
                                                  Europe                                                          we do not allocate our assets by country
                                                                                                                  or regions, we monitor our exposures
                                                                                                                  to ensure adequate risk diversification
                                                                                                                  across them. The geographical
                                                                                                                  distribution of the GIC Portfolio mainly
                                                                                                                  reflects the global market composition
                                                                                                                  and bottom-up opportunities sourced by
                                                                                                                  our investment teams worldwide.

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2 Investment Report                                                                                                                                     18

2.3   Intermediate Markers of
      Investment Performance

      While the GIC Portfolio is             The GIC Portfolio return over the
      constructed to deliver good 20-year    20-year period was 4.6% per annum
      returns above global inflation as      in nominal USD terms. Over the
      its primary metric, we monitor its     10-year period, the GIC Portfolio
      ongoing investment performance         returned 5.2% per annum, as it
      over intermediate periods. Table 2     included the prolonged upturn in
      shows the nominal (not adjusted for    the capital markets after the 2008
      inflation) USD returns over 10 years   Global Financial Crisis. Over the
      and 5 years and the corresponding      5-year period, the GIC Portfolio
      portfolio volatility. We include       return slowed to 3.9%, in line with the
      20-year nominal numbers for            broader asset markets.
      completeness here2.                                                                                                             2
                                                                                                                                      GIC’s primary metric is
                                                                                                                                      the rolling 20-year real
                                                                                                                                      rate of return, which we
                                                                                                                                      described earlier in this
                                                                                                                                      chapter.
      Table 2: Nominal annualised return and volatility of the
      GIC Portfolio (in USD, for periods ending 31 March 2020)

        GIC Portfolio                                                                                                                 3
                                                                                                                                      The GIC Portfolio rates of
                                                                                                                                      return are computed on a
                                             Nominal                                                                                  time-weighted basis, net
        Time Period                          Return 3              Volatility 4                                                       of costs and fees incurred
                                                                                                                                      in the management of the
                                                                                                                                      portfolio.
        20-Year                              4.6%                  9.0%
                                                                                                                                      4
                                                                                                                                      Volatility is computed
        10-Year                              5.2%                  8.0%                                                               using the standard
                                                                                                                                      deviation of the monthly
                                                                                                                                      returns of the GIC
                                                                                                                                      Portfolio over the
        5-Year                               3.9%                  7.0%                                                               specified time horizon.

                                                                                       Report on the Management of the Government’s Portfolio for the Year 2019/20
2 Investment Report                        2.3 Intermediate Markers of Investment Performance                                                                                   19

We also monitor the performance of a       and take on more risk when the                   its diversified asset composition
Reference Portfolio which comprises        opportunity arises. This is part of a            and pre-emptive measures to lower
65% global equities and 35% global         disciplined approach to long-term                portfolio risk. Despite this lower
bonds5. Table 3 shows the nominal                                                                                                                       5
                                           value investing. For example, given              risk exposure than the Reference                            The Reference Portfolio
USD returns over 20 years, 10 years,       weakening fundamentals and rising                Portfolio, the GIC Portfolio has                            was adopted from 1 April
                                                                                                                                                        2013 and reflects the
and five years, and the corresponding      market uncertainty, GIC reduced our              performed creditably over a 20-year                         risk that the Government
                                                                                                                                                        is prepared for GIC to
volatility for the Reference Portfolio6.   public equities and credit positions             period. This reflects our investment                        take in its long-term
                                           that appeared overpriced in the lead-            approach to first preserve and then                         investment strategies.
                                                                                                                                                        For more details, please
The Reference Portfolio is not a           up to 2020. In addition, we exercised            enhance the value of the assets                             refer to the chapter on
                                                                                                                                                        “Managing the Portfolio”.
performance benchmark for the              greater caution when evaluating our              under our management over the
GIC Portfolio but characterises the        investment transactions.                         long term.                                                  6
                                                                                                                                                        The figures exclude
risk the Client is prepared for GIC                                                                                                                     adjustments for costs
to take in generating good long-           Over the three time periods, and                                                                             that would be incurred
                                                                                                                                                        when investing.
term investment returns. GIC may           particularly over the last five years,
occasionally reduce risk exposure          the GIC Portfolio had lower volatility
in times of market exuberance              than the Reference Portfolio due to

Table 3: Nominal annualised return and volatility of the
Reference Portfolio (in USD, for periods ending 31 March 2020)

  Reference Portfolio                                                                                                                                   7
                                                                                                                                                        The Reference Portfolio
                                                                                                                                                        rates of return are
                                            Nominal                                                                                                     provided on a gross
  Time Period                               Return 7                Volatility 8                                                                        basis, i.e. without
                                                                                                                                                        adjustment for costs
                                                                                                                                                        and fees.
  20-Year                                   4.2%                    10.8%
                                                                                                                                                        8
                                                                                                                                                        Volatility is computed
  10-Year                                   5.2%                    9.8%                                                                                using the standard
                                                                                                                                                        deviation of the monthly
                                                                                                                                                        returns of the Reference
                                                                                                                                                        Portfolio over the
  5-Year                                    3.3%                    9.4%                                                                                specified time horizon.

                                                                                                         Report on the Management of the Government’s Portfolio for the Year 2019/20
2 Investment Report                         2.3 Intermediate Markers of Investment Performance                                                                                   20

Investing in                   Given our long-term and flexible
                               investment mandate, GIC was among
                                                                             our long investment horizon, global
                                                                             presence, an extensive network
                                                                                                                              infrastructure and services, as well
                                                                                                                              as in companies with long-term
Private Markets                the earliest institutional investors to       of partners, as well as skilled and              contracted incomes.
                               invest in private markets, starting with      experienced teams.
                               real estate and private equity from the                                                        Long-term themes:
                               mid-1980s. Today, GIC is one of the           Given the lower beta returns outlook             Given the growth of e-commerce and
                               largest institutional investors in private    and rising uncertainty in recent                 rapid technological progress, we have
                               markets globally.                             years, GIC has been working hard                 been acquiring logistics and data
                                                                             to find attractive alpha-generating              centre assets, as well as equity stakes
                               Private market investing is important         opportunities, whilst increasing the             in FinTech, health-tech and enterprise
                               to GIC as it provides portfolio               overall resilience of the portfolio. Alpha       software companies. In infrastructure,
                               diversification benefits and access           is the additional return achieved by             we have invested in sustainability
                               to opportunities not available via            active strategies as compared to the             themes such as renewable energy.
                               public markets, particularly in               Policy Portfolio, while beta comprises
                               emerging markets. Additionally, in            market returns.                                  Risk management:
                               some situations, we can make more                                                              We target investments with good risk-
                               meaningful contributions to the investee      This is reflected in our investment              reward ratios and impose conservative
                               company by having tighter governance          approach for the private markets:                underwriting standards and scenario
                                                                                                                              stress-testing. Our active portfolio
                                                                                                                              management approach includes

                               Given our long-term and flexible                                                               monitoring and reporting capabilities
                                                                                                                              at the asset and portfolio level.
                               investment mandate, GIC was among the                                                          Long-term partnerships:
                               earliest institutional investors to invest                                                     Having a strong global network of
                                                                                                                              contacts and partnerships gives
                               in private markets.                                                                            us valuable access to investment
                                                                                                                              opportunities and market insights. We
                               and influence over its management,                                                             continue to find ways to add value to
                                                                             Resilient incomes:                               our partners and investee companies.
                               strategy, and operations. We can better
                                                                             We have been investing in defensive              Given our stable capital, we seek to
                               achieve this through a private ownership
                                                                             sectors such as rental and manufactured          position GIC as a partner of choice
                               model, which enables us to leverage our
                                                                             housing, logistics and data centres,             when market dislocations occur.
                               competitive advantages, specifically
                                                                             utilities and transport-based

                                                                                                                   Report on the Management of the Government’s Portfolio for the Year 2019/20
2 Investment Report                                  2.3 Intermediate Markers of Investment Performance                                                                                          21

Navigating a                                           In recent years, GIC has taken an
                                                       increasingly cautious macro stance
                                                                                                        These existing vulnerabilities worsened
                                                                                                        with the COVID-19 outbreak, which
                                                                                                                                                              the recent downturn, US equity markets
                                                                                                                                                              are still trading at levels well above their
Profoundly                                             with our investment portfolio. We                resulted in drastic containment                       pre-GFC peaks due to the prolonged
                                                       observed elevated valuations at a time           measures and a sharp decline in global                run-up over the last 12 years.
Uncertain                                              of weakening market fundamentals                 demand and economic growth. As set

Investment                                             and high uncertainties. This was
                                                       compounded by concerns over
                                                                                                        out in Figure 4, equity market volatility
                                                                                                        rose to levels not seen since the GFC,
                                                                                                                                                              The repercussions from the COVID-19
                                                                                                                                                              pandemic will be wide-ranging. How
Environment                                            geopolitical tensions and limited policy         with the global equity market index                   this plays out across the markets
                                                       room to manage an economic downturn.             falling by over 20% in 1Q 2020. Despite               depends crucially on three key factors:

                                                       Figure 4: MSCI AC World Total Return Index in USD vs volatility

                                                                                                                                                                                                                       %

                                      1400                                                                                                                                                                             80%

                                      1200
                                                                                                                                                                                                                       70%

                                                                                                                                                                                                                       60%
                                      1000

                                                                                                                                                                                                                       50%
                                       800
                                                                                                                                                                                                                       40%
                                       600
                                                                                                                                                                                                                       30%
                                       400
                                                                                                                                                                                                                       20%

                                       200
                                                                                                                                                                                                                       10%

                                         0                                                                                                                                                                             0%
        Total Return Index (LHS)
                                                2001

                                                          2002

                                                                 2003

                                                                        2004

                                                                               2005

                                                                                      2006

                                                                                              2007

                                                                                                     2008

                                                                                                            2009

                                                                                                                   2010

                                                                                                                          2011

                                                                                                                                    2012

                                                                                                                                           2013

                                                                                                                                                  2014

                                                                                                                                                           2015

                                                                                                                                                                     2016

                                                                                                                                                                               2017

                                                                                                                                                                                         2018

                                                                                                                                                                                                  2019

                                                                                                                                                                                                            2020
        Annualised Volatility (RHS)

Source: Datastream
                                                                                                                                                   Report on the Management of the Government’s Portfolio for the Year 2019/20
2 Investment Report                          2.3 Intermediate Markers of Investment Performance                                                                                  22

the progression of the outbreak and          GIC has been preparing the portfolio          Prepare, not Predict                            investment environment. A major
effectiveness of containment efforts;        for a period of heightened uncertainty.       This reflects our focus on diversification      retreat from globalisation due to
the spillover of the impact from the         Lessons learned from previous crises          and robust asset allocation, so that            heightened geopolitical tensions,
more vulnerable sectors such as travel,      such as the GFC, SARS and the dotcom          our portfolio remains resilient across          supply chain shifts and nationalistic
trade, and energy to other sectors; and      bust have strengthened our investment         a broad range of scenarios. Given the           policies, is likely to hurt global
macro policy responses to stabilise the      processes and sharpened our thinking.         uncharted outlook, having the humility          productivity growth over the longer
markets, support economic activity, and      This, together with our defensive             to recognise our own biases and keeping         term. It will also affect emerging
keep supply chains open. Already we          portfolio positioning, leave us well          an open and learning mindset are key.           markets that have historically relied
have seen cuts in interest rates and the     placed to invest in market corrections                                                        on foreign investments and export-led
swift roll-out of record fiscal packages     and opportunities that can enhance            Focus on the Long Term                          growth. However, Asian economies are
globally, as governments seek to cushion     our long-term returns.                        This principle is essential to our              likely to adapt their growth strategies
the impact of the extreme containment                                                      mandate and investment approach.                and business models over time, and
measures on businesses and livelihoods.      Importance of our investment                  It reflects our emphasis on long-term           intra-regional trade will strengthen.
                                             principles: ‘Prepare, not Predict’            value and fundamentals over market              How well governments respond to
The timing and shape of the economic         and ‘Focus on the Long Term’                  sentiments. Having a stable source of           the health, economic, and financial
recovery remain highly uncertain,                                                          capital is a significant advantage as it        challenges will be key drivers of their
especially because there may be              Amidst this profound uncertainty,             allows us to target durable trends and          country’s recovery.
subsequent waves of infection around         what keeps GIC anchored is having a           attractive market entry points as asset
the world. The pandemic has also             keen understanding about who we are,          prices correct. We also continue to build       Notwithstanding these challenges,
amplified many existing fundamental          including our mandate, values, risk           on our long-term partnerships and               GIC believes that our experiences
issues, such as weakened social              capacity, capabilities, and constraints.      capabilities to provide flexible capital.       in managing past crises, diversified
compacts, heightened geopolitical            This in turn drives our two key                                                               and disciplined portfolio approach,
tensions, and rising debt levels. As these   investment principles - Prepare, not          GIC’s view is that the COVID-19 crisis          and long-term perspective on
challenges are likely to be protracted, we   Predict, and Focus on the Long Term.          will bring fundamental changes and              our investments, strategy, and
can expect more market turmoil ahead.                                                      even more uncertainty to the global             partnerships, leave us better placed
                                                                                                                                           to navigate this difficult and volatile
                                                                                                                                           investment environment. As the

GIC’s experiences in managing past crises, diversified and                                                                                 custodian of Singapore’s reserves, we
                                                                                                                                           will continue to focus on our mandate
disciplined portfolio approach, and long-term perspective                                                                                  to protect and enhance the value of
                                                                                                                                           the reserves under our management
on our investments, strategy, and partnerships, leave                                                                                      and work hard to secure Singapore’s
                                                                                                                                           financial future.
us better placed to navigate this difficult and volatile
investment environment.
                                                                                                                                Report on the Management of the Government’s Portfolio for the Year 2019/20
3
Managing the Portfolio
GIC’s investment strategy is to build a portfolio
comprising asset classes that generate good long-
term real returns, while adhering to the Client’s
(the Singapore Government) risk parameters.

1                 2            3               4                 5            6
Letter from the   Investment   Managing        Feature Article   Governance   Our People
Chief Executive   Report       the Portfolio
Officer
3 Managing the Portfolio                                                                                                                                              24

3.1   Overview:
      Our Portfolio and How We Manage It

      GIC’s investment strategy is to
      build a portfolio of asset classes and    GIC’s investment framework

      strategies that generates good long-
      term real returns, while adhering
      to the Client’s (the Singapore
      Government) risk parameters.

      Our mission is to preserve                  Policy                             Active                                               GIC
      and enhance the international               Portfolio                          Portfolio                                            Portfolio
      purchasing power of the reserves            · Six core asset                   · Multiple active                                    · Total exposure of
      placed under our management by                classes, or ‘beta’                 strategies, or ‘alpha’                               all investment
      delivering good long-term returns           · Diversified sources               · Diverse sources of                                   activity
      above global inflation.                       of long-term real                  skill-based excess                                 · Within risk limits
                                                    returns                            returns                                              set by Client

      In 2013, we established an
      investment framework that enables
      us to navigate an increasingly
      complex and challenging investment
                                                                         Operating within the Client’s Risk Tolerance
      environment. This framework
      leverages GIC’s strengths, including
      our long investment horizon,
      significant capital pool, global reach,
      best-in-class capabilities, and robust
      governance structure.

                                                                                                     Report on the Management of the Government’s Portfolio for the Year 2019/20
3 Managing the Portfolio                                                                                                                                                        25

3.2   Building the
      Portfolio
                                                                                                                          The Policy Portfolio comprises six
                                                                                                                          asset classes: Developed Market
                                                                                                                          Equities, Emerging Market Equities,
                                                                                                                          Nominal Bonds and Cash, Inflation-
                                                                                                                          linked Bonds, Private Equity, and
      The Client owns the funds that GIC                                                                                  Real Estate. Diversification enables
                                                Policy Portfolio
      manages, and decides on the overall                                                                                 the Policy Portfolio to generate
      risk that the GIC Portfolio can take in                                                                             good risk-adjusted returns over a
                                                                       6          1
      pursuit of good long-term returns.                                                                                  20-year period.
                                                                           4-6%   25-30%
      GIC’s investment process begins                                                                                     The Policy Portfolio has a long
                                                         5
      with the Policy Portfolio, which                                                                                    investment horizon, and is generally
                                                             9-13%
      defines the key asset classes that                                                                                  maintained through market cycles.
      drive the GIC Portfolio’s long-term                                                                                 GIC’s approach to rebalancing ensures
      returns. The Active Portfolio aims                                                                                  we keep to the allocated ranges of
      to add value to the Policy Portfolio                                                                                asset classes in the Policy Portfolio.
      through skill-based, active strategies,                                                                             Rebalancing involves systematically
                                                        6        1
      while preserving the exposure to                                                                                    buying assets that have decreased
      systematic market risks. Together,              11-15%                                                              in price and selling assets that have
                                                  4       4-6%   25-30%
      the Policy Portfolio and Active Portfolio                                                                           increased in price, to keep the asset
                                    6           1
      form the GIC Portfolio.           5                                                             20-30%       2      composition in our portfolio steady
                                               9-13%                                                                      over time. When an asset class such
                                      4-6%      25-30%
      Policy Portfolio:                                                               6           1                       as equities does particularly well,
      Key Investment
              5      Driver                                                                                               the rebalancing rule compels us to
                        9-13%                                   15-20%                                                    sell. Conversely, when equities do
                                                                                          4-6%    25-30%
      The Policy Portfolio represents GIC’s                                                                               poorly, such as after the bursting of an
                                                                 5
      asset allocation strategy over the                                                                                  economic bubble, rebalancing calls for
                                                                       9-13%
                                                                       3
      long term. It accounts for the bulk of                                                                              us to buy. There will be rare occasions
      the risk and return potential 11-15%
                                    of the                                                                                when GIC adjusts our Policy Portfolio’s
                               4                1     Nominal Bonds and Cash      4          Private Equity
      GIC Portfolio, and seeks to balance                                                                                 asset allocation temporarily, in
      the way different asset classes           2     Developed Market Equities   5
                                                                                  20-30%Real      Estate
                                                                                                      2
                                                                                                                          response to medium-term dislocations
      respond11-15%
                to different economic           3     Emerging Market Equities    6          Inflation-linked Bonds
                                                                                                                          in the global investment environment
        4
      environments.                                                                                                       or particular assets or countries.
                                                           20-30%
                                                             11-15%         2
                                                                                                               Report on the Management of the Government’s Portfolio for the Year 2019/20
                                                       4
                                                15-20%
3 Managing the Portfolio                                        3.2 Building the Portfolio                                                                                                                 26

                                                                                                                                                                  Active Portfolio:
                Construction of an Active Strategy from the Policy Portfolio
                                                                                                                                                                  Skill-based Strategies
                The illustrative active strategy “A” has a                      and Cash, and Real Estate. Strategy ‘A’ is
                                                                                                                                                                  The Active Portfolio comprises a
                similar overall risk profile as the weighted                    therefore expected to generate a return
                combination of three asset classes —                            above that of the combination.                                                    group of investment strategies that
                Developed Market Equities, Nominal Bonds                                                                                                          adds value to the Policy Portfolio
                                                                                                                                                                  while broadly maintaining the same
                                                                                                                                                                  level of systematic risk.

                                      Policy Portfolio                                                                                                            ‘Alpha’ is the additional return
                                            6   1
                                                                                                                                                                  achieved by active strategies over and
                                                                                                                                                                  above passive buy-and-hold market
                                  5
                                                                                                                                                                  returns (or ‘Beta’). At GIC, active
                                                                                                                 Active Strategy ‘A’
                                                                                                                                                                  alpha activities are separated from
                                                                                                                 Each active strategy must                        beta activities to manage different
                                                                                                                 generate a return above its
                            4                                                                  2                                                                  return and risk drivers clearly. GIC’s
                                                                                                         1       cost of capital and is funded
                                                                                                                 through the sale of an asset                     alpha activities aim to earn returns
                                                                     2
                                                                                                                 class or combination of asset                    from our teams’ skills and competitive
                                                                                                   5
                                                                                                                 classes in the Policy Portfolio                  advantages.
                                                                                                                 with a similar overall
                 Policy Portfolio 3                                                                              risk profile.
                                                                                                                                                              Each active strategy is funded by the
                        6         1                                                                                                                           sale of a Policy Portfolio asset class
        Policy Portfolio
            5
                                                                                                                                                              or combination of asset classes with a
            6       1                                                                              Active Strategy ‘A’                                        similar overall risk profile. This funding
                                                                     Policy Portfolio                                                                         is the cost of capital for the active
    5                                                                                              Each active strategy must
                                                                                  1              generate ‘A’
                                                                                                           a return above its                                 strategy, over which the strategy
                1               Nominal Bonds and Cash           4           6 Private
                                                                                2
                                                                                         Active Strategy
                                                                                       Equity
        4                                                                                1       cost of capital and is funded                                is required to generate additional
                                                             5                           Each active strategy must
                2               Developed Market 2Equities       5             Real Estate        through the sale of an asset                                returns. For example, active strategies
                                                                                         generate a return above its
                                                                     2                            class or combination of asset            Active Strategy ‘A’designed to outperform public equities
4                                                                6               15      cost of Bonds
                                                                               Inflation-linked  capital and is funded
                3               Emerging Market Equities                                          classes in the Policy Portfolio
                                        2                                                through the sale of an asset                      Each active strategy
                                                                                                                                                              aremust
                                                                                                                                                                    funded from passive public equity
                                                                                                  with a similar overall                   generate a returnholdings
                                                                                                                                                               above its in the Policy Portfolio. This
                        3                                                                class or combination of asset 2
                                                         4               5                        risk profile.                             cost of capital and is funded
                                                                                         classes in the Policy Portfolio          1
                                                                                                                                                              way, passive investments in the Policy
                                                                                                                                           through the sale of an asset
                                                                                                 2
                                                                                         with a similar overall
            3                                                                                                                                                 Portfolio
                                                                                                                                           class or combination    of assetare replaced by an active
                                                                                         risk profile.                       5
                                                                                                                                           classes in the Policy Portfolio
                                                                                                                                           with a similar
                                                                                                                                                     Reportoverall
                                                                                                                                                           on the Management of the Government’s Portfolio for the Year 2019/20
                                                                         3
                                                                                                                                           risk profile.
3 Managing the Portfolio                   3.2 Building the Portfolio                                                                                       27

strategy with the potential for greater    GIC Portfolio
returns without additional systematic
risk to the portfolio.                     Through the Policy Portfolio and
                                           Active Portfolio, the GIC Portfolio is
The GIC Board sets an active risk          diversified across asset classes, with
budget that the GIC Management             each carrying a different risk and
can use for its alpha strategies. These    return profile. Growth assets such
strategies are stress-tested so we         as equities generate higher returns,
can understand and quantify their          but are riskier. Defensive assets
performance under various extreme          such as sovereign bonds offer lower
but plausible market conditions,           returns for lower risk, and protect the
including macroeconomic and                portfolio in market downturns.
geopolitical events. The active risk
budget establishes the total level
of risk for the Active Portfolio. For      The GIC Board sets an active risk
example, marketable alternatives
or hedge funds typically invest in         budget that the GIC Management
liquid markets and vary their market
exposures via a combination of long
                                           can use for its alpha strategies.
and short positions, depending on
market conditions. The risk and return     The GIC Portfolio is constructed
profile of this strategy is similar to a   to be resilient across a broad range
combination of Developed Market            of possible market and economic
Equities as well as Nominal Bonds          conditions, while generating good
and Cash, and will be funded by            returns above global inflation in
these asset classes.                       the long term.

                                                                                     Report on the Management of the Government’s Portfolio for the Year 2019/20
3 Managing the Portfolio           3.2 Building the Portfolio                                                                                                                 28

Principles                                       In GIC, portfolio construction is founded on the following principles
                                                 that define the fundamental basis upon which we allocate capital:
of Portfolio
Construction
                                                 Playing to                           We pick and size asset classes and active         access to market opportunities, better
                                                 one’s strengths                      strategies within the GIC portfolio               understanding and ability to structure
In GIC, portfolios are constructed                                                    according to our investment capabilities.         and manage the investments, and
to give them the best chances of                                                      This means putting more capital in                greater confidence that our investment
achieving their intended purposes                                                     areas where we think GIC has better               theses will play out.
over appropriate horizons and within
appropriate risk limits. For the GIC
portfolio as a whole, this means
achieving good long-term returns
over 20 years while limiting potential           Portfolio                            This starts with a clear understanding            scenarios, and that also gives us the
                                                 diversification                      of the real underlying risks of each              best prospective return. Such a portfolio
downside over the shorter term.
                                                                                      investment in various scenarios. Then             will invariably be diversified to a large
                                                                                      we put together different combinations            extent, taking advantage of the fact that
                                                                                      of investments in various amounts, and            risks are not perfectly correlated and
                                                                                      stress-test their overall risk. Finally, we       therefore they work best in combination
                                                                                      choose the portfolio combination that             rather in concentration.
                                                                                      abides by our risk limits even in bad

                                                 Disciplined and                      It is important to ensure that ongoing            intended asset class mix. Actively
                                                 judicious portfolio                  management of investment portfolios is            managed portfolios are reviewed
                                                 management                           disciplined and based on good analysis            regularly in light of changing market
                                                                                      and judgment. The GIC portfolio is                conditions and developments in our
                                                                                      rebalanced regularly to preserve the              active management capabilities.

                                                                                                                             Report on the Management of the Government’s Portfolio for the Year 2019/20
3 Managing the Portfolio                     3.2 Building the Portfolio                                                                                                              29

                                                                          Operating within the                           allocates to a better diversified range
Distribution of asset classes in the                                      Client’s Risk Tolerance                        of assets beyond just equities and
Reference Portfolio which characterises
the Client’s risk preference
                                                                                                                         bonds. We may also adjust our level
                                                                          GIC’s Client is the Government, who            of risk in times of market exuberance
                                                                          owns the funds that GIC manages, and           or when significant opportunities
                                                                          has characterised its risk preference          arise. This is all part of a disciplined,
                           65%                                            using a portfolio of 65% global equities       professional approach to long-term
                                                                          and 35% global bonds (“65-35”). We             investing.
                                                                          refer to this as the Reference Portfolio.
                                                                          The Reference Portfolio is not a               Governance of the
                                                                          benchmark, but an expression of the            Investment Framework
                                                                          overall risk that the Client is prepared
                                                                          for the GIC Portfolio to take.                 The investment framework
                                                                                                                         encapsulates the various long-term
                                                                          GIC’s investment strategy is to build a        risk and return drivers for GIC. It also
                                                                          portfolio comprising asset classes that        reflects the responsibilities of the
    35%                                                                   can generate good long-term returns            GIC Board and Management. The
                                       65%                                above global inflation while adhering          Reference Portfolio characterises the
                                                                          to our Client’s risk parameters. There         Client’s risk appetite, while the GIC
                                                                          will be differences in exposures and           Board approves the Policy Portfolio
                                                                          level of risk between the GIC Portfolio        that is designed to deliver good,
                                                                          and the Reference Portfolio. GIC               long-term returns. GIC Management

             Equities            Fixed Income                             GIC’s investment strategy is to build a
                                                                          portfolio comprising asset classes that
                   35%
                                                                          can generate good long-term returns
                                                                          above global inflation, while adhering
                                                                          to our Client’s risk parameters.

                                                                                                              Report on the Management of the Government’s Portfolio for the Year 2019/20
3 Managing the Portfolio                3.2 Building the Portfolio                                                                                                       30

is empowered to add value within        and process. Investment Board               Board ensures that GIC takes into
the risk limits stipulated by the GIC   members come from the private               account potential reputational risks
Board through the Active Portfolio      sector and may not necessarily be GIC       arising from investment activities.
which comprises active, skill-based     Board Directors. Together, they offer
strategies.                             extensive experience in various types       The table below summarises the
                                        of investments across geographies.          governance of the investment
The Investment Board provides an        The Investment Board ensures that           framework.
independent layer of oversight on       GIC invests in a sound and disciplined
GIC’s active investment management      manner. Additionally, the Investment

Governance of the investment framework

   GIC Board                            • Approves the Policy Portfolio and active risk budget

   Investment Strategies                • Reviews GIC Management’s recommendations on the Policy Portfolio
   Committee                              and active risk budget

   Investment Board                     • Oversees GIC Management’s active strategies and large investments
                                        • Ensures GIC does not incur undue reputational risk in pursuit of returns

   Risk Committee                       • Advises the GIC Board on risk matters
                                        • Sets the overall direction of risk management policies and practices in GIC
                                        • Reviews significant risk issues arising from GIC’s operations and investments

   GIC Management                       • Designs and recommends the Policy Portfolio
                                        • Adds value by constructing and managing the Active Portfolio within
                                          the risk tolerance in GIC’s mandate set by the Client

   Investment Teams                     • Implement the Policy Portfolio and active strategies

                                                                                                  Report on the Management of the Government’s Portfolio for the Year 2019/20
3 Managing the Portfolio                                                                                                                                                        31

3.3   Investment
      Process
                                                                          currency, and corporate governance
                                                                          culture, as well as sector fundamentals
                                                                          such as industry structure, drivers,
                                                                          and trends. This top-down approach
                                                                                                                          long-term returns, we consider all
                                                                                                                          opportunities and risks that could
                                                                                                                          drive investment value in the long
                                                                                                                          run. These considerations, which
                                                                          is similar for both public and private          include track record, ability, and
                                                                          markets. Our bottom-up analysis                 integrity of management teams and
                                                                          is more varied and depends on the               business practices, are integral to
                                 As a disciplined, long-term value        assets we invest in. For example, in            our investment process. We expect
                                 investor, we take a systematic,          public equities, we focus on the stock’s        our investee companies to comply
                                 patient, and diversified approach in     fundamentals, such as the company’s             with applicable laws and regulations
                                 seeking investment opportunities,        business model and its competitive              and apply appropriate corporate
                                 differentiating between an asset’s       strengths, balance sheet, profitability,        governance and stakeholder
                                 current price and its intrinsic value.   and management. In real estate, our             engagement practices.
                                                                          teams conduct bottom-up analyses
                                 GIC’s investing approach is              based on property-specific factors              We also actively advocate long-term
                                 underpinned by our discipline to         such as location, building quality,             thinking in the wider community.
                                 distinguish price from value. An         tenant mix, lease expiry profiles, and          We participate in initiatives such as
                                 asset’s price is driven largely by       income stream outlook. Our value                Focusing Capital on the Long Term
                                 market sentiment, while its value lies   investing mindset is the common                 Global (FCLTGlobal), the International
                                 in its fundamental worth. Anchored       underlying principle.                           Forum of Sovereign Wealth Funds
                                 by this perspective, we appraise                                                         (IFSWF), and the Task Force on
                                 value thoroughly and adhere to price     In all our analyses, looking for long-          Climate-related Financial Disclosures
                                 discipline, even when it sometimes       term value is key. To deliver good              (TCFD).
                                 means going against prevailing
                                 market sentiment.
                                                                          GIC’s investing approach is underpinned
                                 To determine where true fundamental
                                 value lies, we use both top-down and     by our discipline to distinguish price
                                 bottom-up analyses. We identify and
                                 assess drivers of long-term value as a
                                                                          from value. An asset’s price is driven
                                 core part of our investment process.     largely by market sentiment, while its
                                 In the top-down analysis, we review
                                 a country’s macroeconomics, politics,    value lies in its fundamental worth.
                                                                                                                          .
                                                                                                               Report on the Management of the Government’s Portfolio for the Year 2019/20
3 Managing the Portfolio                                                                                                                                      32

3.4   Navigating
      Thematic Changes

      GIC’s O-D-E framework
                                                          GIC’s “O-D-E” approach

                                                          New forces, from climate change to            In the next page, we explain how
                                                          geopolitical tensions to technological        sustainability is a key focus area for
                                                          advances, play an increasingly                GIC given its long-term impact on
                                                          important role in global economies            consumer and business behaviour,
                                                          and markets.                                  which in turn affects company
                                  OFFENCE
                                                                                                        valuations as well as the communities
                                                          To ensure our continued performance           our investee companies serve.
                                                          over the long term, GIC identifies and        Technology, a second major theme,
                                                          organizes major thematic changes              has also been increasingly important
                                                          using a framework called O-D-E. It            in shaping GIC’s strategies. (For
                                                          is a holistic approach we adopt for           more information, you can refer to
                                 O-D-E                    our investments and operations.
                                                          O refers to going on the Offensive
                                                                                                        our feature article in our FY2018
                                                                                                        Report.) In the table that follows this
                                 FRAMEWORK
                                                          when it comes to investment                   section, we illustrate how we have
                                                          opportunities, D indicates Defensive          applied our O-D-E framework to
                                                          risk management, and E is the manner          two major disruptive forces in recent
         DEFENCE                             ENTERPRISE
                                             EXCELLENCE   in which we constantly improve our            years, sustainability and technology.
                                                          operations and processes to achieve
                                                          Enterprise Excellence.

                                                                                             Report on the Management of the Government’s Portfolio for the Year 2019/20
3 Managing the Portfolio                         3.4 Navigating Thematic Changes                                                                                                    33

GIC’s Approach                       Sustainability is core to GIC’s mandate       world. These factors shape the long-term       Our investment teams, through their

to Sustainability                    as a long-term investor managing the
                                     reserves for Singapore. It is an important
                                                                                   prospects of companies, and hence their
                                                                                   long-term value. Negative externalities,
                                                                                                                                  engagement with the companies’
                                                                                                                                  management and industry experts,
                                     investment issue and a key management         such as climate change, are also               are able to gain better insights on a
                                     priority. By sustainability, we mean          increasingly being incorporated into the       company’s sustainability strategy and
                                     Environmental, Social, and Governance         decisions of regulators, businesses and        long-term positioning. This enables us
                                     (ESG) issues that could affect companies’     consumers. As a long-term investor, we         to make better value comparisons. As a
                                     performance and operations.                   position our portfolio to weather a range      responsible investor, GIC takes a holistic
                                                                                   of market and economic conditions by           and progressive approach to drive long-
                                     GIC was founded in 1981 to secure             taking ESG risks into account at every         term positive outcomes for society. We
                                     Singapore’s long-term financial               stage of the investment process, and           believe it is more constructive to actively
                                     future, and tasked with preserving            by supporting our investee companies           engage companies to support them
                                     and enhancing the international               in their transition towards more               in their transition towards long-term
                                     purchasing power of the reserves under        sustainable business practices and a low-      sustainability, rather than to adopt a
                                     our management. Ensuring long-term            carbon economy.                                blunt divestment approach.

                                                                                   GIC’s management views sustainability          By integrating an ESG lens into our
We believe that companies with stronger                                            as a key priority. Our Sustainability          management and investment process,

sustainability practices will generate                                             Committee, which was formalised
                                                                                   in 2016, is tasked to implement our
                                                                                                                                  we build resilience and diversification in
                                                                                                                                  our portfolio to achieve better long-term
better risk-adjusted investment returns                                            sustainability framework, support and
                                                                                   promote sound stewardship, and monitor
                                                                                                                                  returns. Diversification is also essential
                                                                                                                                  to GIC’s strategy to secure good long-
over the long term, and this relationship                                          and respond to emerging ESG issues.            term returns, and our investments

will strengthen over time.
                                                                                   The committee engages our Investment           span many sectors and impact many
                                                                                   Board on broad sustainability trends,          stakeholders. As a responsible steward,
                                                                                   emerging risks in our portfolio, as well       we strive to create better outcomes for
                                     sustainability is therefore an important      as potential investment opportunities.         our portfolio and the communities our
                                     way for us to fulfil our responsibility.      These top-down insights are shared and         investments touch.
                                     Sustainability trends and ESG risks have      empower our bottom-up teams across all
                                     a profound and growing impact on both         asset classes to make informed decisions
                                     the physical as well as the financial         when assessing investments.

                                                                                                                       Report on the Management of the Government’s Portfolio for the Year 2019/20
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