2018 / 19 Report on the Management of the Government's Portfolio - International Forum of Sovereign Wealth Funds
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2018 / 19 Report on the Management of the Government’s Portfolio
OVERVIEW
Who We Are 2018/19 Highlights
GIC’s mission is to secure Singapore’s financial future. Performance
We invest for the long term to preserve and enhance
the international purchasing power of the reserves • GIC achieved a 20-year annualised rate of return of 3.4% above global inflation
placed under our management. Our work contributes for the financial year ended 31 March 2019.
to the well-being of present and future generations • We are prepared for the uncertainty ahead and aim to deliver sustained long-term
of Singaporeans. Long-term orientation and value returns on the reserves under our management, for the benefit of Singapore.
discipline are at the heart of our investment philosophy.
We manage a robust and diversified portfolio to generate
steady real returns over a 20-year investment horizon, Appointments
so as to fulfil our mission. We consider and integrate
all opportunities and risks to deliver long-term value We welcome:
through our investment and corporate practices.
• Mr Tharman Shanmugaratnam as our Deputy Chairman on 1 May 2019.
GIC employs over 1,500 people across our 10 offices
• Mr Lawrence Wong, who was appointed to the GIC Board on 1 November 2018.
worldwide. We are committed to engaging and growing
our people. As an institution and as individuals, we are • Mr Seck Wai Kwong, who was appointed to the GIC Board on 9 November 2018.
guided by our common values of Prudence, Respect,
Integrity, Merit and Excellence to achieve the results we • Mr Chan Chun Sing, who was appointed to the GIC Investment Strategies
seek without compromising our reputation. Committee on 1 October 2018.
• Mr Carsten Stendevad, who was appointed to our International Advisory Board
on 1 October 2018.
The year in numbers
3.4% Annualised rolling
20-year real rate of return
Outlook
• In view of the high valuations, slowing global growth, and significant
Over uncertainties, we maintain our cautious portfolio stance.
1,500 Number of employees • Our diversified portfolio, disciplined investment approach, and flexible
capabilities leave us well-placed to invest in this challenging environment.
Our teams will also continue to search for compelling idiosyncratic
opportunities, and stand ready to take advantage of potential dislocations.
Report on the Management of the Government’s Portfolio for the Year 2018/19 2
OVERVIEW
The GIC Primer
Our mission is to preserve and enhance the long-term international purchasing power of
the reserves placed under our management. People and talent are central to what we can
do. We believe that the results we seek are best achieved through a culture founded on
our five PRIME values of Prudence, Respect, Integrity, Merit and Excellence.
P R I M E
Prudence Respect Integrity Merit Excellence
We exercise prudence and All of us are united in Everything we do is founded We recruit and develop We are relentless in our
sound judgement and take a common endeavour, on integrity. We expect the our people solely on merit. pursuit of excellence. In
a considered approach to regardless of who we are, highest standards of honesty We draw our talent from all that we do, we strive to
managing risks as we seek where we work or what we from everyone in GIC, around the world and provide be the best that we can be.
to deliver good investment do. We respect people as both in our work and in our challenging and meaningful This demands that we plan
returns, always conscious individuals, care for their personal lives. This includes work. We grant recognition and anticipate well, so that
of our overriding fiduciary well-being, and welcome abiding by the laws of the and reward based on we will always be in time
responsibility. diversity in capability and countries we invest in, and performance and conduct for the future, fully able to
background. We do not observing our code of ethics consistent with our PRIME take up the challenges and
As an institution and as tolerate behaviour that works in letter and in spirit. values. We develop our people opportunities that come,
individuals, we conduct against the interest of our to achieve their potential so pursuing improvements
ourselves with good sense Client or of GIC. We must never jeopardise that we may also perform to where they may be found, and
and circumspection, even as the trust others have in us our potential. economies where these may
we take the best advantage We stress teamwork within and in our reputation for be gained.
of our large asset base, and across departments, professionalism. We select business partners
global presence, multi- and with our Client and based on their capability. We expect everyone to do
asset approach and long- business partners. We expect We believe in long-term their best in every situation.
term orientation. everyone to be free, candid relationships built upon high We harness the creativity and
and constructive in their levels of performance and imagination of our people
comments and suggestions, quality of service. and our business partners for
and always seek to help our superior results.
colleagues and GIC do better.
Report on the Management of the Government’s Portfolio for the Year 2018/19 3
OVERVIEW
The GIC Way
The GIC Way is a set of principles that defines the way we think and act.
It sharpens our focus on our Client, our commitment to our people and future.
Client First People – The Key Future Now
• When our Client does well, we do well • Do what’s right, not what’s easy • Tomorrow is determined today
• Never compromise our PRIME values and • Help GIC make the best decisions – • Build leadership and resources for
reputation; not even for better returns speak up if you have a different view the future
• Always follow GIC’s investment • Attract exceptional people and develop • Insist on nimble and responsive
principles: them to their full potential structures and processes
▸ Pursue intrinsic value and maintain • Embolden innovation and
price discipline encourage learning
▸ Practise long-term investing • Reward what matters: contribution; not
pedigree, age, gender or nationality
▸ Pick our spots: be focused and leverage
our strengths • Excel in what you do; make a difference
▸ Pay attention to risk control • Empower decision-making at every level
▸ Prepare for the future • Work seamlessly across boundaries and
hierarchy – OneGIC
Report on the Management of the Government’s Portfolio for the Year 2018/19 4
CONTENTS
6 Overview from the 36 Feature Article: Asia’s Growing 61 Our People
Chief Executive Officer Importance in the Global Economy
62 One Global Team
and Financial Markets
62 High-performing Team and
10 Investment Report 37 A Growing Global Economic and
Collaborative Culture
Financial Footprint
11 Long-term Investment Performance
63 Developing Our People
39 Will Asia’s Rise Continue?
14 Portfolio Distribution and
64 Key Organizational Movements
Intermediate Performance Markers 41 Asia Has Challenges to Overcome Before It
Can Deliver Its Full Potential 64 Our Compensation Principles
17 Investing in an Uncertain and Lower Return
Environment 42 How Does GIC invest in Asia? 65 Building Confident Communities
42 Conclusion 66 Our Offices
18 Managing the Portfolio
19 Our Portfolio and How We Manage It 43 Governance
20 Building the Portfolio 44 Source and Purpose of Funds
25 Investment Process 44 The President of Singapore
27 Investment Implementation 44 The Government
30 Managing Risks 47 GIC’s Governance Structure
50 Organizational Structure
51 Profiles of Board, Board Committee
Members and Advisors
58 Executive Management
Report on the Management of the Government’s Portfolio for the Year 2018/19 5
Overview from the Chief Executive Officer Report on the Management of the Government’s Portfolio for the Year 2018/19
O verview
The Investment Environment longer-term capital expenditures, which has in
turn contributed to weak global growth. Should
and Strategy
the policy uncertainty lead to a deeper economic
While the start of the last fiscal year saw financial slowdown, major markets such as Europe and
markets pricing in a “synchronised global Japan would have little policy ammunition to
recovery”, we are back in an environment of respond and are therefore likely to experience a
“lower for longer”. Financial markets are focused more protracted downturn. Emerging markets
on the US Fed’s next move in its monetary policy, on the whole have more policy room to cushion
trade tensions between major powers, and against a global slowdown, though economies
growing political polarisation. We are observing with larger imbalances and vulnerabilities could
high risk asset valuations that mask weak be exceptions. In short, policymakers’ scope to
market fundamentals and growing economic counter an inevitable downturn is limited. With
uncertainties. The investment landscape today high asset valuations and low interest rates, the
continues to point to low and volatile returns in case for investor caution remains strong.
the future.
Beyond the current cycle, structural tensions
Grow th forecasts were revised sharply around rising income inequality, populism,
downwards last year and markets correspondingly and job displacements by technology are likely
sold off. Policymakers across major economies to remain. As policymakers around the world
shifted to more accommodative policies, after grapple with these challenges, it is imperative
LIM CHOW KIAT
which markets once again priced in a “lower for to preserve the system of open and integrated
Chief Executive Officer, GIC
longer” path for future interest rates, and markets economies that has improved the lives of so many.
recovered. While this policy shift is expected to
Notwithstanding current trade tensions, Asia
GIC’s mission is to preserve and enhance the remove the downside risk of over-tightening, its
remains a constellation of dynamic, open
international purchasing power of the reserves impact is expected to be limited. We expect global
economies with some of the highest growth
under our management over the long term. These growth to remain subdued.
rates globally. We first invested in the region
reserves are important to Singapore as a rainy day
Political and policy uncertainties remain in the 1980s, and are today among the largest
fund, an endowment fund, and a stability fund.
high, as ongoing trade tensions between the institutional investors in Asia. In the long term,
For the year ended 31 March 2019, we achieved a US and China, continuing fragmentation in we expect the region’s economic growth to
20-year annualised rate of return of 3.4% above Europe and the long-drawn Brexit process remain strong and outstrip other regions. There
global inflation. Our 20-year portfolio volatility continue to weigh on business sentiment. This are many compelling reasons to believe this: from
remained relatively low at 8.9%. has discouraged businesses from undertaking the liberalisation of its markets, the innovative,
Report on the Management of the Government’s Portfolio for the Year 2018/19 7O verview
driven spirit of its people, and its demographic Development Board, bringing together Silicon In conclusion, GIC will continue to invest in
profile. We discuss these in greater detail in our Valley’s leading investors and start-ups with our people, capabilities and networks. We abide
feature article, Asia’s Growing Importance in the our partners in Asia to look at disruption in the by a core investment principle – to “prepare,
Global Economy and Financial Markets. financial services sector. not predict” – in today’s uncertain investment
environment. This will help us to deliver
sustained long-term returns on the reserves under
Building Collaborative Partnerships Senior Leadership Appointments our management, for the benefit of Singapore.
and Internal Capabilities and Renewals
GIC’s primary mission remains to preserve On 1 July 2019, we welcomed new appointments.
and enhance the long-term international Mr Tay Lim Hock succeeded Mr Goh Kok Huat
purchasing power of the reserves placed under as Chief Operating Officer, concurrent to his
our management. As we face a low growth and appointment as Deputy Group Chief Investment
increasingly uncertain world, we will rely even Officer. Mr Tay will further integrate operations, LIM CHOW KIAT
more on our long-term investment approach and infrastructure and technology to deliver ongoing Chief Executive Officer
global network of partnerships. Beyond taking business services and longer term capabilities.
advantage of any dislocations in the investment Mr Arjun Gupta was appointed President
environment, we seek to work with our partners (Europe) to continue to strengthen GIC’s platform
on creating new opportunities. in Europe by extending our business networks
with partners, regulators and policymakers.
As a global investor, GIC looks to enhance Dr Leslie Teo was succeeded by Mr Kevin Bong
existing ties and forge new relationships with as Director, Economics & Investment Strategy,
partners worldwide. In October last year, we and by Dr Prakash Kannan as Chief Economist.
held our annual GIC Insights Forum in Beijing, in
conjunction with our 20th anniversary in China, I would like to express deep gratitude to Mr Goh
bringing together eminent thought leaders, Kok Huat and Dr Leslie Teo for their contributions
business executives, and our partners. In March to GIC, and for laying the groundwork for our
this year, we celebrated with 130 of our Latin future. I have had the privilege of working
American partners the fifth anniversary of our alongside them for more than a decade, during
Brazil office, having invested in Latin America which GIC’s capabilities were much strengthened.
for two decades. More recently in April, we held On behalf of all in GIC, I extend my appreciation
our second Bridge Forum in San Francisco, to them for their many years of dedicated service.
co-organised by the Singapore Economic
Report on the Management of the Government’s Portfolio for the Year 2018/19 8OVERVIEW
Welcome
Tharman Shanmugaratnam Lawrence Wong Seck Wai Kwong Chan Chun Sing Carsten Stendevad
Mr Tharman Mr Lawrence Wong was Mr Seck Wai Kwong was Mr Chan Chun Sing Mr Carsten Stendevad
Shanmugaratnam was appointed to the GIC appointed to the GIC was appointed to was appointed to our
appointed as our Deputy Board on 1 November 2018. Board on 9 November 2018. the GIC Investment International Advisory
Chairman on 1 May 2019. Mr Wong is Minister for Mr Seck is Chief Executive Strategies Committee on Board on 1 October 2018.
Mr Tharman is Senior National Development Officer of Eastspring 1 October 2018. Mr Chan Mr Stendevad is Senior Fellow
Minister and Co-ordinating and the Second Minister Investments. He is also on is Minister for Trade and at Bridgewater Associates
Minister for Social for Finance. He has been the GIC Risk Committee. Industry, and Minister-in- and former Chief Executive
Policies, and continues to a member of the GIC charge of the Public Service. Officer of Arbejdsmarkedets
chair the GIC Investment Investment Strategies Tillægspension (ATP).
Strategies Committee. Committee since
August 2017.
Senior Leadership Appointments and Renewals
Thank You On 1 July 2019, we welcomed new appointments:
• Mr Tay Lim Hock as Chief Operating Officer
It has been our privilege to have benefitted from the experience and expertise • Mr Arjun Gupta as President (Europe), based in London
of Mr Knut Kjær, who stepped down after his active service on the GIC • Mr Kevin Bong as Director, Economics & Investment Strategy
Investment Strategies Committee for six years in November 2018. We also • Dr Prakash Kannan as Chief Economist, while retaining his current role
thank Mr Mark Kritzman, who stepped down from the GIC Investment as Head, Total Portfolio Management, Economics & Investment Strategy
Strategies Committee and Risk Committee in May 2019.
For their years of dedicated service, we thank:
• Mr Goh Kok Huat, who retired as Chief Operating Officer
• Dr Leslie Teo, who retired as Chief Economist and Director, Economics &
Investment Strategy
Report on the Management of the Government’s Portfolio for the Year 2018/19 9Investment 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 its management. Report on the Management of the Government’s Portfolio for the Year 2018/19
I nvestment R eport
Long-term Investment Performance
GIC’s mandate is to achieve good long-term Figure 1: Annualised Rolling 20-Year Real Rate of Return of the GIC Portfolio since 20012
returns over global inflation. This is represented
by the primary metric for evaluating GIC’s %
investment performance – the rolling 20-year 7
real rate of return. GIC’s goal is to beat global 6
inf lation, and preser ve and enhance the
international purchasing power of the reserves 5
placed under its management. 4
Investment returns in global markets are 3
inherently cyclical and volatile even over 20-year
2
periods. For example, the rolling 20-year real
return for a US 65% equities and 35% bonds 1
portfolio went below 2% in the 1980s, but reached 0
as high as 10% in 2000. 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Over the 20-year period that ended 31 March Year ended 31 March
2019, the GIC Portfolio generated an annualised
real1 return of 3.4% (see Figure 1). In the last
three years, GIC’s 20-year rolling real return
has been below 4%. This was essentially due to
the exceptionally high returns of the tech bubble
period in the late 1990s dropping out of the
20-year window, while the post bubble declines
remained (see next page). We expect this one-off
effect, coupled with the continuing environment
of low returns, to weigh on the rolling 20-year
return over the medium term.
1
An annualised real return is the return adjusted for global inflation. The real return number is independent of the currency used to compute it.
2
The first 20-year period since GIC’s inception in 1981 ended in March 2001.
Report on the Management of the Government’s Portfolio for the Year 2018/19 11I nvestment R eport
GIC’s long-term performance is largely driven
Understanding the Rolling 20-Year Return by the dynamics of the global economy and
our asset allocation strategy as reflected in the
GIC reports its performance as an annualised 20-year real return, which is the average time-weighted
Policy Portfolio. This is complemented by the
portfolio return over that period. It is a rolling return, which means that last year’s 20-year return spans the
period 1999 to 2018, this year’s 20-year return spans 2000 to 2019, and next year’s return will span 2001 to performance of skill-based strategies undertaken
2020. For each new year added, the earliest year is dropped out of the computation window. The change in by active strategy investment teams, seeking
a multi-year period annualised rolling return from year to year is therefore determined by the returns from to add returns above market benchmarks. In
the earliest year that drops out and the latest year that is added. aggregate, we strive to achieve the best possible
long-term returns for the GIC Portfolio across
a variety of economic scenarios, within the risk
Figure 2: Illustration of a Portfolio’s Rolling 20-Year Return parameters set by the Client. Our long-term focus
is elaborated in Investment Approach (see next
20-year return in 2017
page) and in the chapter on Managing the Portfolio.
20-year return in 2018
20-year return in 2019
20-year return in 2020
1998 1999 2000 2001 2017 2018 2019 2020
Year
Report on the Management of the Government’s Portfolio for the Year 2018/19 12I nvestment R eport
Investment Approach GIC focuses on long-term
GIC’s long-term investment approach has a few key features. We generate returns from exposure to fundamentals and value
systematic risk factors, such as the equity risk premium. We invest in illiquid asset classes such as private
equity and real estate which offer the prospect of better returns. Exposure to these risk premia enables GIC rather than on short-term
to harness the power of compounding over time.
market price gyrations.
In addition, GIC focuses on long-term fundamentals and value rather than on short-term market price
gyrations. This reduces the chances of overpaying at market tops or underinvesting at market bottoms.
Long-term investing is not a rigid buy-and-hold approach. As a long-term investor, GIC seeks to distinguish
price from value. If an asset’s price exceeds its long-term fundamental value, we would tend to sell, and vice
versa, even if doing so goes against current market sentiment.
Report on the Management of the Government’s Portfolio for the Year 2018/19 13I nvestment R eport
Portfolio Distribution and Intermediate Performance Markers
The GIC Portfolio Table 1: Asset Mix of the GIC Portfolio While the GIC Portfolio’s asset allocation is
constructed to achieve an appropriate long-term
The GIC Portfolio is a well-diversified portfolio Asset Mix
31 March 31 March
balance of risk and return, the geographical
2019 (%) 2018 (%)
of asset classes. Each asset class carries a distribution of the portfolio is fluid and depends
different risk-return profile. The aim of the Developed Market Equities 19 23
primarily on market capacity, economic cycles
Portfolio is to have the right mix of growth assets Emerging Market Equities 18 17 and investment opportunities.
such as equities which generate higher returns Nominal Bonds and Cash 39 37
but are riskier, and defensive assets such as
Inflation-linked Bonds 5 5
sovereign bonds which offer lower returns but
Real Estate 7 7
help protect the portfolio in market downturns.
As the future is uncertain, the GIC Portfolio is Private Equity 12 11
constructed to be resilient across a broad range of Total 100 100
plausible market and economic conditions, while
generating positive long-term real returns.
Figure 3: Geographical Distribution of the GIC Portfolio
Table 1 and Figure 3 show the asset mix and
geographical distribution of the GIC Portfolio as
of 31 March 2019.
12%
6% Eurozone
United
Kingdom 20%
32% Asia ex
United Japan
States 7%
Middle East, 12%
Africa and Japan
the rest of
Europe
3%
Latin
America
8%
Rest of the
World
Report on the Management of the Government’s Portfolio for the Year 2018/19 14I nvestment R eport
Intermediate Markers of Table 2: Nominal Annualised Return and The GIC Portfolio’s 20-year real return was 3.4%
Volatility of the GIC Portfolio per annum, or 5.5% in nominal USD terms. Over
Investment Performance
(in USD, for periods ending 31 March 2019) the 10-year period ending March 2019, the GIC
While the GIC Portfolio is constructed to deliver Portfolio returned 8.6% per annum in nominal
good 20-year returns above global inflation GIC Portfolio USD terms. These unusually high returns do not
as its primary metric, we monitor its ongoing reflect the underlying potential of global markets.
intermediate investment performance. Table 2 Time Period Nominal Return4 Volatility5 In particular, the 10-year period included the
shows the nominal USD returns over 20 years3 , 20-Year 5.5% 8.9% sharp recovery of the stock markets from the 2009
10 years and 5 years and the corresponding 10-Year 8.6% 8.4% trough of the Global Financial Crisis. The strong
portfolio volatility. 5-Year 4.9% 6.2%
performance of the asset markets over the decade
also reflected the unprecedented reductions in
interest rates and boost to liquidity globally.
Over the 5-year period, the GIC Portfolio return
was 4.9% per annum in nominal USD terms.
While the upturn in the global economy and
supportive monetary policies helped to push up
market valuations, concerns of a slowdown and
tightening in liquidity globally drove periodic
market corrections.
3
GIC’s primary metric is the rolling 20-year real rate of return, which we described earlier in this chapter.
4
The GIC Portfolio rates of return are computed on a time-weighted basis, net of costs and fees incurred in the management of the portfolio.
5
Volatility is computed using the standard deviation of the monthly returns of the GIC Portfolio over the specified time horizon.
Report on the Management of the Government’s Portfolio for the Year 2018/19 15I nvestment R eport
We also monitor the performance of a Reference Table 3: Nominal Annualised Return and Over the three time periods, the GIC Portfolio has
Portfolio which comprises 65% global equities and Volatility of the Reference Portfolio lower volatility than the Reference Portfolio due
35% global bonds6 . The Reference Portfolio is not (in USD, for periods ending 31 March 2019) to its diversified asset composition. Despite its
a performance benchmark for the GIC Portfolio. lower risk exposure than the Reference Portfolio,
Rather, it characterises the risk the Client is Reference Portfolio the GIC Portfolio has performed creditably over
prepared for GIC to take in generating long-term a 20-year period.
investment returns. GIC may occasionally lower Time Period Nominal Return7 Volatility8
its risk exposure, in times of exceptional market 20-Year 5.2% 10.6%
exuberance. Conversely, GIC may increase its 10-Year 9.3% 9.9%
risk exposure when the opportunity arises. This 5-Year 5.0% 7.7%
is part of a disciplined, professional approach to
long-term value investing. For example, in the last
few years, GIC took steps to lower the risk in the
portfolio by reducing its allocation to developed
market equities given high asset valuations
amidst an increasingly uncertain market outlook
(see section on Investing in an uncertain and lower
return environment).
Table 3 shows the nominal USD returns over 20
years, 10 years and 5 years and the corresponding
volatility for the Reference Portfolio. The figures
do not include adjustments for costs that would
be incurred when investing.
6
The Reference Portfolio was adopted from 1 April 2013, and reflects the risk that the Government is prepared for GIC to take in its long-term
investment strategies. It comprises 65% global equities and 35% global bonds. For more details, please refer to the chapter on Managing the Portfolio.
7
The Reference Portfolio rates of return are provided on a gross basis, i.e. without adjustment for costs and fees.
8
Volatility is computed using the standard deviation of the monthly returns of the Reference Portfolio over the specified time horizon.
Report on the Management of the Government’s Portfolio for the Year 2018/19 16I nvestment R eport
Investing in an Uncertain and Lower Return Environment
The investment climate remains challenging Over the longer term, market returns are Given the highly uncertain and muted outlook,
over the next few years. High valuations, slowing projected to be well below what we experienced we will maintain strong price discipline, by not
global growth and significant uncertainties since the 1980s. Interest rates are low and overpaying for assets, and reducing exposure
portend lower returns for both the GIC Portfolio current equity market valuations are elevated. when the risk-reward trade-off is less favourable.
and the Reference Portfolio. GIC maintains its The fundamental economic and earnings We will continue our efforts to strengthen our
cautious portfolio stance. growth outlook is also expected to be modest networks, build capabilities and seek attractive
due to structural headwinds from demographics, alpha generating opportunities. Our established
Despite the increase in market volatility in elevated debt, slower rate of globalisation and presence across most asset classes in the
2018, market valuations remain elevated across lower productivity growth. There is limited emerging markets is also expected to benefit from
most risk assets. Valuation metrics for the US evidence of structural reforms to counter these structural improvement and contribute positively
equity markets and high yield credit continue trends. Further, the tensions that we highlighted to our longer-term performance.
to be well above historical averages. Global in previous years – around inequality, populism,
transaction volumes in private markets have geopolitical conflicts and the potential impact of Overall, our diversified portfolio, disciplined
exceeded previous peaks and valuations have disruptive technologies – are likely to persist. investment approach and flexible capabilities
been driven higher. leave us well-placed to invest in this challenging
environment. Our teams will also continue to
Developed markets are now closer to late cycle, search for compelling idiosyncratic opportunities,
particularly in the US, with economic and and stand ready to take advantage of potential
corporate earnings indicators showing signs of dislocations.
slowing. Further, financial vulnerabilities are
growing due to high corporate and non-bank
leverage, poorer credit quality and untested
liquidity risks. We also expect growth in China
to moderate amidst weaker labour force growth
and ongoing efforts to reduce the build-up in
debt while managing trade tensions with the US.
Notwithstanding this, the Fed’s move to delay
further rate rises and China’s fiscal stimulus
efforts could provide some growth support in the
near term.
Report on the Management of the Government’s Portfolio for the Year 2018/19 17Managing 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. Report on the Management of the Government’s Portfolio for the Year 2018/19
M anaging the P ortfolio
Our Portfolio and How We Manage It
GIC’s investment strategy is to build a portfolio
comprising asset classes that generate good long- Policy Portfolio Active Portfolio GIC Portfolio
term real returns, while adhering to the Client’s
Allocation among six Comprises overlay of Represents actual
(the Singapore Government) risk parameters.
core asset classes alpha (i.e. active, exposures of GIC
Our mission is to preserve and enhance the skill-based strategies) Portfolio
Key driver of returns
international purchasing power of the reserves
over the long term + Adopted by = Within risk limits set
placed under our management by delivering good
GIC Management by the Client
long-term returns above global inflation. Approved by GIC Board
Overseen by
To this end, we established an investment GIC Investment Board
framework that equips GIC for an increasingly
challenging and complex investment environment.
Adopted in 2013, the framework leverages GIC’s
strengths, including our ability to invest for
the long term, flexible capital and governance Adhering to Client’s Risk Tolerance
structure.
Report on the Management of the Government’s Portfolio for the Year 2018/19 19M anaging the P ortfolio
Building the Portfolio Policy Portfolio: Conversely, when equities do very poorly, such
as after the bursting of an economic bubble,
Key Investment Driver
rebalancing calls for acquiring assets that have
The Client owns the funds that GIC manages, and The Policy Portfolio represents GIC’s asset decreased in price. Nevertheless, GIC does
decides on the overall risk that the GIC Portfolio allocation strategy over the long term. It accounts occasionally adjust its asset allocation over
can take in pursuit of good long-term returns. for the bulk of the risk and return potential of the medium term when there are fundamental
the GIC Portfolio. The Policy Portfolio seeks to changes in the global investment environment,
The investment process begins with the Policy
balance the way different asset classes respond to such as structural shifts in the risk and return
Portfolio, which defines the key asset classes that
varied possible economic environments. profile of a particular asset class or geographical
drive the GIC Portfolio’s long-term returns. The
region.
Active Portfolio aims to add “alpha” to the Policy The Policy Portfolio comprises six asset classes:
Portfolio through skill-based, active strategies Developed Market Equities, Emerging Market
while preserving the exposure to the systematic Equities, Nominal Bonds and Cash, Inflation- 9–13%
market risks. The Policy Portfolio and Active linked Bonds, Private Equity and Real Estate.
Portfolio together form the GIC Portfolio. 20–30%
Through the diversity of asset classes, the Policy
Portfolio is expected to generate good risk- 11–15%
adjusted returns over a 20-year period.
The Policy Portfolio has a long-term investment Policy Portfolio
horizon and is not intended to be adjusted
frequently or in response to market cycles. 4–6%
GIC’s approach to rebalancing our portfolio
ensures we keep to the allocated ranges of asset 15–20%
classes in the Policy Portfolio. Rebalancing
involves systematically buying assets that have
decreased in price and selling assets that have 25–30%
increased in price, to keep the asset composition
in our portfolio steady over time. When an asset Developed Market Equities Inflation-linked Bonds
class such as equities does particularly well, Emerging Market Equities Private Equity
the rebalancing rule compels investors to sell. Nominal Bonds and Cash Real Estate
Report on the Management of the Government’s Portfolio for the Year 2018/19 20M anaging the P ortfolio
The GIC Board sets an active risk budget which
The GIC Portfolio is Active Portfolio:
GIC Management can use for its alpha strategies.
Skill-based Strategies
constructed to be resilient These strategies are stress-tested to understand
The Active Portfolio comprises a group of and quantify their performance under various
across a broad range of investment strategies in which managers add extreme but plausible market conditions,
value to the Policy Portfolio, while broadly including macroeconomic and geopolitical
possible market and economic maintaining the same level of systematic risk. events. The active risk budget establishes the
conditions, while generating Alpha is the additional return achieved by active
total level of risk for the Active Portfolio. GIC
Management employs risk budgeting to allocate
good returns above global strategies as compared to the Policy Portfolio,
while beta comprises market returns. At GIC,
risk to different strategies.
inflation in the long term. active alpha strategies are separated from beta
activities to better manage our return and risk GIC Portfolio
drivers. Our beta activities seek to achieve a
diversified mix of asset classes through careful Through the Policy Portfolio and Active
portfolio construction which considers the Portfolio, the GIC Portfolio is diversified across
response of various asset classes to different asset classes, with each carrying a different
possible economic environments. Our alpha risk and return profile. Growth assets such as
activities aim to earn returns from GIC’s skills equities generate higher returns, but are riskier.
and competitive advantages. Defensive assets such as sovereign bonds offer
lower returns, but embody lower risk and protect
Each active strategy must generate a return above the portfolio in market downturns.
its cost of capital and is funded through the sale
of an asset class or combination of asset classes The GIC Portfolio is constructed to be resilient
in the Policy Portfolio with a similar overall risk across a broad range of possible market and
profile. For example, active strategies designed to economic conditions, while generating good
outperform public equities are funded from public returns above global inflation in the long term.
equity holdings in the Policy Portfolio. This way,
passive investments in the Policy Portfolio are
replaced by an active strategy with the potential
for greater returns without additional systematic
risk to the portfolio.
Report on the Management of the Government’s Portfolio for the Year 2018/19 21M anaging the P ortfolio
Principles of Portfolio Construction
In GIC, portfolios are constructed to give them the best chances of achieving their stress-test their overall risk. Finally we choose the portfolio combination that
intended purposes over appropriate horizons and within appropriate risk limits. abides by our risk limits even in bad scenarios, and that also gives us the best
For the GIC Portfolio as a whole, this means achieving good long-term returns prospective return. Such a portfolio will invariably be diversified to a large
over 20 years while limiting potential downside over the shorter term. extent, taking advantage of the fact that risks are not perfectly correlated and
therefore they work best in combination rather in concentration.
In GIC, portfolio construction is founded on the following principles:
3. Disciplined and judicious portfolio management – It is important to ensure
1. Playing to one’s strengths – We pick and size asset classes and active that ongoing management of investment portfolios is disciplined and based
strategies within the GIC Portfolio according to our investment capabilities. on good analysis and judgment. The GIC Portfolio is rebalanced regularly
This means putting more capital in areas where we think GIC has better to preserve the intended asset class mix. Actively-managed portfolios are
access to market opportunities, better understanding and ability to structure reviewed regularly in light of changing market conditions and developments
and manage the investments, and greater confidence that our investment in our active management capabilities.
theses will play out.
All these principles are the basis upon which we allocate capital in GIC’s Policy
2. Portfolio diversification – This starts with a clear understanding of the Portfolio which represents our strategic asset allocation, and in our Active
real underlying risks of each investment in various scenarios. Then we put Portfolio and its actively-managed strategies.
together different combinations of investments in various amounts, and
Report on the Management of the Government’s Portfolio for the Year 2018/19 22M anaging the P ortfolio
Reference Portfolio: Characterising GIC’s investment strategy is to
the Client’s Risk Preference 35% build a portfolio comprising
The Client owns the funds that GIC manages,
and decides on the overall risk preference, which asset classes that can generate
is characterised by a Portfolio made up of 65%
global equities and 35% global bonds (“65:35”). Reference Portfolio good long-term returns above
The Reference Portfolio is not a benchmark, global inflation, while adhering
but an expression of the overall risk that the
Client is prepared for the GIC Portfolio. The
65%
to our Client’s risk parameters.
65:35 Portfolio reflects a reasonable trade-off
of risk and return. Historically, it has delivered
good compounded long-term returns despite
periodic drawdowns. Equities Fixed Income
GIC’s investment strategy is to build a portfolio
comprising asset classes that can generate good
long-term returns above global inflation, while
adhering to our Client’s risk parameters. On
occasion, there may be a difference between the
risk exposure of GIC and the Reference Portfolio.
GIC may adjust its risk exposure, in times of
market exuberance or when the opportunity
arises. This is part of a disciplined, professional
approach to long-term value investing.
Report on the Management of the Government’s Portfolio for the Year 2018/19 23M anaging the P ortfolio
Governance of the In its totality, our investment framework opportunities; presence in major financial
leverages GIC’s strengths. These include our cities; and a governance structure that clearly
Investment Framework
long-term investment horizon; capabilities in lays out the responsibilities of the GIC Board
The investment framework encapsulates the both public and private markets and to use these and Management.
various long-term risk and return drivers for GIC. capabilities to develop cross-asset investment
It also reflects the responsibilities of the GIC
Board and Management. The Reference Portfolio
characterises the Client’s risk appetite, while the The following table summarises the responsibilities within GIC under the investment framework.
GIC Board approves the Policy Portfolio which
is designed to deliver good, long-term returns. Responsibility
GIC Management is empowered to add value
within the risk limits stipulated by the GIC Board GIC Board • Approves the Policy Portfolio and active risk budget
through the Active Portfolio which comprises
• Reviews GIC Management’s recommendations on the Policy
active, skill-based strategies. Investment Strategies Committee
Portfolio and active risk budget
The Investment Board (IB) provides an
independent layer of oversight on GIC’s active • Oversees GIC Management’s active strategies and
investment management and process. IB large investments
Investment Board
members come from the private sector and • Ensures GIC does not take on undue reputational risk in pursuit
may not necessarily be GIC Board Directors. of returns
Together, they offer extensive experiences in
• Recommends the Policy Portfolio and constructs the
various types of investments across geographies.
Active Portfolio
The IB ensures that GIC invests in a sound and GIC Management
• Adds value through the Active Portfolio within the risk tolerance in
disciplined manner. Additionally, the IB ensures
GIC’s mandate set by the Client
that GIC takes into account potential reputational
risks arising from investment activities. Investment Teams • Implement the Policy Portfolio and conduct active strategies
Report on the Management of the Government’s Portfolio for the Year 2018/19 24M anaging the P ortfolio
Our bottom-up analysis is more varied and
Investment Process depends on the assets we invest in. For example,
GIC’s investing approach is
in public equities, we focus on the stock’s underpinned by our discipline
As a disciplined long-term value investor, we take fundamentals, such as the company’s business
a systematic, patient and diversified approach in model and its competitive strengths, balance to distinguish price from
seeking investment opportunities, where there is sheet, profitability and management. In real
a clear difference between the current price and estate, our teams conduct bottom-up analysis value. An asset’s price is
intrinsic value of an asset. based on property-specific factors such as
location, building quality, tenant mix, lease
driven largely by market
GIC’s investing approach is underpinned by
our discipline to distinguish price from value.
expiry profiles and income stream outlook. sentiments, while its value
Our value investing mindset is the common
An asset’s price is driven largely by market underlying principle. is its fundamental worth.
sentiments, while its value is its fundamental
worth. Anchored by this perspective, we seek to To deliver good long-term returns, we consider
appraise value appropriately and adhere to price all opportunities and risks that could drive
discipline, even when it sometimes means going investment value in the long run. These
against prevailing market sentiments. considerations, which include track record,
ability and integrity of management teams and
To determine where true fundamental value lies, business practices, are integral to our investment
we identify and assess drivers of long-term value process. We expect our investee companies to
as a core part of our investment process. This comply with applicable laws and regulations
approach comprises top-down and bottom-up and apply appropriate corporate governance and
analyses for all investments. In the top-down stakeholder engagement practices.
analysis, we review a country’s macroeconomics,
politics, currency and corporate governance We also actively advocate long-term thinking
culture, as well as sector fundamentals such in the wider community, as exemplified by our
as industry structure, drivers and trends. This participation in initiatives such as Focusing
top-down approach is similar for asset classes in Capital on the Long Term Global and the
public and private markets. International Forum of Sovereign Wealth Funds.
Report on the Management of the Government’s Portfolio for the Year 2018/19 25M anaging the P ortfolio
Investing Sustainably Establishing a robust sustainability process
GIC’s assessment of a company’s value includes an evaluation of the
It is our belief that companies with good sustainability practices are likely to sustainability practices of the company and their potential impact on its value.
generate strong investment returns over the long term, on a risk-adjusted basis. We embed such considerations into the investment process, by including
Our approach hence integrates sustainability considerations into our investment sustainability factors in investment analysis, due diligence and risk assessment.
and corporate processes. Additional due diligence is conducted on companies with greater exposure to
sustainability issues.
Taking a long-term perspective
GIC invests to preserve and enhance the long-term value of our total portfolio. Responsible stewardship
Sustainable long-term investing requires holistic assessment of risks and We are guided by sound stewardship principles to promote sound corporate
returns. Corporate practices in the areas of environment, social and governance governance and sustainable business practices. We engage with portfolio
(ESG) have generally impacted long-term value, and are therefore an important companies on sustainability and exercise our voting rights in a responsible
consideration in our investment decision process. manner. Our voting choices are informed by a set of global principles and policies,
while being sensitive to local differences. Our votes reflect our long-term view
and sustainability beliefs.
Report on the Management of the Government’s Portfolio for the Year 2018/19 26M anaging the P ortfolio
Investment Asset Allocation
Implementation Constructs long-term portfolio policy, undertakes medium-term asset allocation,
as well as innovates alternative investment models
At GIC, our investment teams work to find
attractive bottom-up investment opportunities.
Public Markets Private Markets
Our core investment groups are Public Equities,
Fixed Income, Private Equity, Real Estate and Public Equities Private Equity
Infrastructure. In addition, our Integrated Fixed Income Infrastructure
Strategies Group evaluates and invests in cross- Portfolio Execution Group Real Estate
asset investment opportunities. Our External External Fund Managers External Fund Managers
Fund Managers supplement the expertise of
our core investment groups, while the Portfolio Invests across developed and emerging markets
Invests in opportunities with the potential to
Execution Group and Investment Services further in equities and fixed income, constructing a
generate high long-term real returns and the ability
support the implementation of the investment diversified portfolio to produce sustainable,
to diversify our portfolio
decisions made. risk-adjusted performance
We are open to investing in all countries outside Cross Asset
of Singapore, but do not invest in countries that
are subject to United Nations Security Council Integrated Strategies Group
sanctions. We monitor our investee companies
and exercise ownership rights, with the intent to Focuses on cross asset and less conventional investment opportunities, develops thematic investment
preserve and enhance long-term investment value strategies and actively expands our network of relationships beyond traditional domains
and protect the financial interests of our Client.
Investment Services
Supports public and private market investment activities
Report on the Management of the Government’s Portfolio for the Year 2018/19 27M anaging the P ortfolio
Investment Groups in Public and Fixed Income Group Real Estate Group
Private Markets GIC Fixed Income is broadly organised along three GIC was an early entrant among institutional
GIC invests in both public and private markets. areas: Global Macro, Global Credit and Cross-asset investors in real estate. Our investments in the
In public markets, we invest in public equities in Systematic investing. We invest across the entire space now include traditional private real estate
both developed and emerging markets, absolute fixed income spectrum which includes government (brick-and-mortar assets), public equities, real
return strategies (hedge funds), fixed income bonds, emerging market bonds, corporate bonds estate investment trusts and real estate-related
and cash. We manage a diversified portfolio to and loans, convertible bonds, hybrid securities, debt instruments. Our real estate assets span
produce good risk-adjusted performance. In securitized products, structured credit and global multiple property sectors, including office, retail,
private markets, we invest in opportunities that currencies. Our multi-asset macro and systematic residential, industrial and hospitality.
have the potential to generate high long-term real strategies also invest in asset classes such as
returns and the ability to diversify the portfolio. equities and commodities. Through active asset management, GIC can further
Real estate assets, in particular, also serve as a generate income and enhance the market value of
hedge against inflation. its assets through tenant management, market
Private Equity Group
positioning, leasing and capital improvements.
GIC’s private equity (PE) universe includes
Public Equities Group buyouts, minority growth, pre-IPOs, venture
Infrastructure Group
Our equity investing effort is carried out by a capital, private credit and special situations such
team of in-house research analysts and portfolio as distressed debt, and secondary PE. We invest GIC Infrastructure Group takes a multi-pronged
managers, organised along product groups in companies directly and through funds. The approach to investing. We invest directly in
specialising in total return, relative return and direct investment programme is focused on taking private equity that operate infrastructure
quantitative strategies. The team conducts minority equity positions and providing junior assets with a high degree of cash flow visibility
in-depth due diligence and research to identify and senior debt financing in buyouts. Our funds and which provide a hedge against inflation.
businesses with the potential to generate good strategy aims to identify, and invest with, leading These include mature, low- to moderate-risk
long-term returns. private equity, venture capital, private credit and assets in developed markets, complemented by
special situations funds globally, and grow with investments with higher growth potential in
them in the long run. We have built up a network emerging markets. The group also invests in
of over 100 active fund managers. The investment infrastructure funds, non-investment grade
teams add value to the boards and management of infrastructure debt and structured investments
the investee companies by providing advice and in listed infrastructure companies.
access to a global network of business links.
Report on the Management of the Government’s Portfolio for the Year 2018/19 28M anaging the P ortfolio
Integrated Strategies Group Portfolio Execution Group Investment Services
Integrated Strategies Group (ISG) focuses on The Portfolio Execution Group is responsible GIC has a dedicated investment ser vices
cross-asset and less conventional investment for implementing liquid market decisions, and team that supports public and private market
opportunities across products and geographies. is made up of two arms – the Global Trading investment activities. This includes support for
ISG collaborates with the other groups to jointly Unit (GTU) and the Treasury and Portfolio deal closing, investment and data operations,
invest in large investment opportunities. ISG Management Group (TPMG). GTU executes investment reporting, management reporting,
also invests independently in any of GIC’s asset investment decisions across all public market portfolio accounting, valuation and financing.
classes, where appropriate. It develops thematic asset classes and provides market intelligence.
investment strategies and expands our network of GTU is organised into four teams – Equities,
relationships beyond traditional domains. Fixed Income and Currencies, Liquid Strategies
and Execution Research – and operates around the
External Fund Managers clock across three centres – Singapore, London
GIC engages external fund managers to access and New York. TPMG is responsible for total
investment capabilities and opportunities, portfolio rebalancing, liquidity management,
in various sectors and geographies. External strategy funding, as well as equity beta replication
managers enable GIC to gain exposure across and financing. Our portfolio managers seek
public and private markets. They also provide us efficiency while minimising transaction costs.
with valuable investment insights.
Report on the Management of the Government’s Portfolio for the Year 2018/19 29M anaging the P ortfolio
Risk Governance
Managing Risks The GIC Board provides ultimate risk oversight. The Chief Risk Officer (CRO) is a member of the
Investing involves pr udent risk-taking. The Board approves the Policy Portfolio which Group Executive Committee and reports to the
Identifying and managing risk is therefore a core is constructed with our Client’s long-term real Chief Executive Officer (CEO) and Chairman
responsibility of all GIC staff. Each employee return objective and risk tolerance in mind. of the Board Risk Committee. The CRO is
has individual accountability and clearly defined Deviation of asset allocation exposure from accountable to the Board of Directors, primarily
responsibilities within our risk management policy benchmarks is constrained by a set of through the Board Risk Committee, on all risk-
framework. This ensures risks taken are in line operating bands around the Policy Portfolio’s related matters.
with the risk tolerance set by the Client. target weights. In addition, the GIC Board sets
an active risk budget to limit the risk arising The CRO chairs the Group Risk Committee
from the deviation of the Active Portfolio from that is vested with responsibility to oversee
the Policy Portfolio. The GIC Board is supported implementation of risk policies, review significant
by the Board Risk Committee, which advises the risk issues from investments and operations, as
Risk Management Objectives
Board on risk matters. The Board Risk Committee well as to ensure the resolution of these issues.
GIC’s risk management objectives are to sets the overall direction of risk management
ensure that: policies and practices in GIC. In addition, it
1. The investment strategies pursued are reviews significant risk issues arising from GIC’s
consistent with the risk tolerance set by the operations and investments.
Client, and within defined bounds authorised
by the Client, Board and Management.
The Group Executive Committee is the highest
management body in GIC. It deliberates on
2. The risks associated with each investment investment and risk issues before they are
are well-understood. submitted to relevant board committees. It is also
3. Policies, guidelines and control processes the forum that assesses and makes determinations
are in place to reduce the likelihood of on fiduciary risk and reputational risk issues.
significant losses.
4. Any reputational impact due to our actions
is carefully managed.
Report on the Management of the Government’s Portfolio for the Year 2018/19 30M anaging the P ortfolio
Three Lines of Defence The Second Line: Independent Risk Functions The Third Line: Internal Audit
Risk management and control functions Our Internal Audit Department (IAD) forms
GIC’s risk management model operates along independent of the risk-taking business units the third line of defence. It provides an
“three lines of defence” which ensure that there are the second line of defence. They provide independent assessment and assurance on the
is clarity and transparency in risk ownership and appropriate day-to-day risk oversight and control. adequacy and effectiveness of our internal risk
accountability. These functions include risk management, legal management controls. It reports functionally to
and compliance, information and technology risk the Chairperson of the Audit Committee, and
The First Line: Operating Units management, as well as tax and finance. While administratively to the CEO.
People are the cornerstone of any risk they each have their defined set of responsibilities,
management system. All GIC staff are expected to they also work collectively to provide the requisite
act with integrity and exercise sound judgement; checks and balances to the risk-taking activities
they need to understand, evaluate and carefully of GIC’s investment groups.
manage the risks that they take.
All operating units own, and are primarily
accountable for, the risks inherent in their Three Levels of Risk Management
activities. They are responsible for ensuring that
an appropriate risk-and-control environment
and robust processes are in place as part of their Risk Management and
day-to-day operations. Our risk assessments are Operating Units Internal Audit
forward-looking and form an important element
Control Functions
of our long-term approach. We consider a broad
spectrum of risks with potential long-term First line of defence: Second line of defence: Third line of defence:
impact, including sustainability risks and risks
Risk management by Independent risk control Internal audit
from activities managed by appointed agents.
business operations and compliance
Risk
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