2019/20 Report on the Management of the Government's Portfolio - GIC
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Report on the Management of the Government’s Portfolio 2019/20
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
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
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
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.
Report on the Management of the Government’s Portfolio for the Year 2019/20
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.
Report on the Management of the Government’s Portfolio for the Year 2019/20
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
Report on the Management of the Government’s Portfolio for the Year 2019/20
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
Report on the Management of the Government’s Portfolio for the Year 2019/20
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
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
Report on the Management of the Government’s Portfolio for the Year 2019/201 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 2019/202 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
Report on the Management of the Government’s Portfolio for the Year 2019/202 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
Report on the Management of the Government’s Portfolio for the Year 2019/202 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
Report on the Management of the Government’s Portfolio for the Year 2019/202 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
Report on the Management of the Government’s Portfolio for the Year 2019/202 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.
Report on the Management of the Government’s Portfolio for the Year 2019/202 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 2019/202 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 2019/202 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 2019/202 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 2019/202 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 2019/203 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 2019/203 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 2019/203 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 2019/203 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 2019/203 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 2019/203 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 2019/203 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 2019/203 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.
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