What GIC’s annual results tell us about sovereign wealth under Covid-19

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Today (Tuesday July 28) the Government of Singapore Investment Corporation (GIC), one of the biggest and most sophisticated sovereign wealth vehicles in the world, announced its full-year return to March 31 ,2020.

Chief executive Lim Chow Kiat has been saying for at least two years that high valuations, weakening fundamentals and political tensions around the world were becoming alarming.

That’s not to say he and his team saw the global pandemic coming – but it probably helped.

Lim Chow Kiat, GIC

“The defensive stance helped the portfolio withstand some of the more extreme market movements,” Lim said today, and one can see the caution in the difference between the asset mixes one year apart.

Between March 31, 2019 and the same date in 2020, the proportion of the portfolio allocated to nominal bonds and cash jumped from 39% to 44%, and inflation-linked bonds from 5% to 6%.

Equities fell proportionally (developed market from 19% to 15%, emerging market from 18% to 15%).

Real estate was flat, and private equity up, from 12% to 13%, despite a perennial challenge for the fund in finding places to deploy its money.

History talking

In essence, there’s a shift from volatile public assets to illiquid and therefore more predictable private assets. This is why GIC, which is diversified, turned a (long-term) profit, and Temasek, with a totally different mandate that positions it almost entirely in equities, made a loss. It was still GIC’s worst 20-year annualized return for a decade.

This is history talking. GIC is there for the long run, which is why its headline number is the 20-year rolling rate of return: currently a nominal rate of 4.6%, or, after adjusting for global inflation, an annualized real rate of return of 2.7%. That latter figure is down from 3.4%.

Is this Covid -19 impacting the results? A bit, but not as much as you might think.

A bigger impact is the fact that 21 years ago, the market was in the middle of the tech bubble, and GIC was benefiting accordingly. This year, the late-1990s boom years are no longer reflected in the 20-year returns, impacting today’s number two decades later. And, if that seems an excuse, Lim specifically predicted it when he spoke to Euromoney last year.

GIC never discloses its total assets under management. Every year there is something called the Net Investment Returns Contribution, which is made up of up to 50% of the net investment return from the reserves under management by GIC, Temasek and the Monetary Authority of Singapore, and up to 50% of the net investment income from past reserves from the remaining assets.

In combination, the NIRC is usually the single largest revenue source for the Singapore government, and this year it stood at an estimated S$18 billion ($13 billion).


Usually, that’s all that is taken from the fund. But this year, the government drew a further S$52 billion from past reserves.

This is unprecedented. Only once in its history, after the global financial crisis in 2008, has Singapore drawn on its past reserves, and this year’s withdrawal was more than 10 times the size of that one.

But, then again, why not? What is a sovereign wealth fund for if not for extreme emergency circumstances like these – the proverbial rainy day?

“Covid-19 will not be the last crisis that Singapore faces,” says the GIC report today.

Geographically, the GIC portfolio mix is interesting, in that it doesn’t look much like any particular benchmark. The US accounts for 34% of assets, the eurozone 13% and the UK 6%. These are lower than, for example, the MSCI World allocations.

Asia represents relatively large allocations: 19% for Asia ex-Japan, then a further 13% for Japan. Latin America is 2%, Middle East and Africa a high 5%, and the rest of the world 8%.

GIC doesn’t allocate assets by country or regions; instead it monitors its exposures for risk diversification. That means the geographical position isn’t a means to an end, but a reflection of what bottom-up opportunities look like. This suggests Asia and emerging markets are relatively attractive.

Covid response

GIC specifically says in its annual review that Asia is likely to outperform over the long term.

In an essay with its annual report, GIC looks at the impact of the Covid-19 environment and, in particular, policy responses.

Noting two fundamental changes in policymaking – monetary policy where central banks are not responding pre-emptively to signs of inflation, and fiscal policy with extreme stimulus – GIC suggests there is a risk of higher inflation in the medium term, and a likelihood of currency moves having a bigger impact on asset returns for global investors.

Both will be tricky to navigate for a sovereign fund. If inflation does return, “it would imply a very different investment landscape relative to what investors have been used to,” GIC says. “In particular, the correlation between equities and bonds could become positive, making it difficult for asset allocators to achieve diversification.”