SINGAPORE (July 17): Singapore’s state investor has certainly come a long way since 1974, when it held a mixed-bag of companies that included an abattoir, a chicken essence producer, a bank, an airline, a knock-down furniture maker and a golf shoemaker.

Today, Temasek Holdings is gearing up for the future with investments in genomics, agribusiness and e-commerce.

In its FY2017 review, Temasek reported a one-year total shareholder return (TSR) of 13.37%.

The portfolio grew to a record value of $275 billion, buoyed by a recovery in global growth and equity markets. It improved by $33 billion; in contrast, in the previous year, its portfolio value shrank 9% y-o-y to $242 billion.

Total wealth added for the year was $14.6 billion, which is the total dollar-value return above the fund’s risk-adjusted cost of capital.

However, on a 10- and 20-year rolling basis, Temasek’s TSR is 4% and 6%, respectively. These rates of returns have been steadily declining over the years, amid low growth and low interest-rate conditions globally.

Additionally, as market valuations hover at their historic highs, further upside in returns is going to be limited.

Looking ahead, among Temasek’s concerns are potential credit risks in China, where it is significantly invested. Its third-largest holding is China Construction Bank Corp, which accounts for 4% of the total portfolio.

Singapore Telecommunications is its largest holding, accounting for 12% of the total portfolio, followed by DBS Group Holdings, at 5%.

Indeed, Temasek’s officers say they are “cautiously positive” about the global economy’s outlook, as central banks unwind their balance sheets and liquidity tightens.

“We have a constructive outlook on the global economy, but are conscious of political risks and stretched market valuations, especially over the medium term,” says Temasek chairman Lim Boon Heng in a statement.

What does this mean for the state coffers?

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Evolving strategies When Temasek was incorporated in 1974, its portfolio essentially consisted of 35 companies that the government had invested in.

The objective was to free the Ministry of Finance, which became its shareholder, from the management of these businesses.

The initial portfolio included Singapore Airlines; Development Bank of Singapore (now DBS Group); Jurong and Keppel shipyards, now under Sembcorp Industries and Keppel Corp; the bird park and the zoo. Many others have since been divested or liquidated, including United Industrial Corp, Intraco, National Iron & Steel Mills, and Singmanex, a company that bought and sold rice.

For a long time, Temasek played the role of steward, focusing on the companies it had inherited. It was not until 2002 that it began to seek investments outside of Singapore, starting with emerging markets in Asia. Nevertheless, it still holds significant stakes in a number of Singapore companies, and last year privatised rail operator SMRT.

However, in recent years, particularly in the aftermath of the global financial crisis, Temasek’s portfolio took a hit as its equity investments in financial institutions and oil and gas players tanked.

In 2009, the government implemented a new Net Investment Returns (NIR) framework, which allows it to spend up to 50% of the long-term expected real returns on its net assets managed by sovereign wealth fund GIC and the Monetary Authority of Singapore.

This was a change from the previous arrangement, where the government could only spend from actual investment income from dividends and interest.

However, Temasek was not included in the scheme then. The government said at the time that one reason was there were no established methodologies for projecting long-term real returns on its portfolio. Also, it acknowledged that Temasek’s investment strategy was still evolving.

In 2015, the government announced that Temasek would make up part of the NIR framework from 2017. Now, Temasek contributes its total expected returns, which includes realised and unrealised capital gains, as well as the dividends paid to the Ministry of Finance.

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Positioning for the future Temasek’s investment officers are focused on building long-term, sustainable returns, riding on the mega trends of digitalisation, rising middle-class affluence and ageing population demographics.

Lee Theng Kiat, CEO of Temasek International, says the fund is focusing on longer-term opportunities in the technology, life sciences, agribusiness, non-bank financial services, consumer, and energy and resources sectors.

Lee adds that, over the last six years, investments in these areas have grown to make up nearly a quarter of the portfolio, from 8% before, and are “delivering better returns than our average return from our portfolio as a whole”.

Some of the tech investments made during the year include Amazon.com, the global e-commerce retailer; Ctrip.com International, a Chinese online travel reservations platform; Koubei, an Alibaba-affiliated local services guide for offline merchants in China; and Wish, a global mobile shopping start-up in San Francisco.

Temasek has also pumped US$800 million ($1.1 billion) into Verily Life Sciences, the Google spin-off that focuses on disease detection. Among its projects are a smart contact lens with an embedded sensor that helps diabetes patients monitor their glucose levels, and a recently-launched, four-year study to gather data to understand how healthy people become sick.

In the agribusiness sector, Temasek is also invested in Impossible Foods, a Bayarea company that develops plant-based products such as a meatless burger patty. More recently, the fund has invested in WuXi NextCODE, a contract genomics company that uses sequence data for clinical diagnostics.

It has also signed an agreement to acquire a majority stake in Global Healthcare Exchange, which provides an electronic trading exchange and cloud-based supply chain software for healthcare providers and suppliers. Indeed, the portion of unlisted assets has grown to 40% of the portfolio. It was a third of the portfolio in 2015, and made up just 18% in 2007.

Temasek says that since 2002, its investments in unlisted securities have, on aggregate, “delivered better returns” than its listed investments.

To be sure, its listed assets have underperformed largely as a result of the global financial crisis and its aftermath.

Temasek’s officers point out that its portfolio has still performed better than a number of benchmark indices.

Still, are we likely to see a bigger proportion of unlisted assets in the coming years? Would that help ease the volatility and fluctuations of the portfolio?

“For us it’s not just a question of exceeding market returns. We have to exceed our cost of capital over the longer term,” says Rohit Sipahimalani, joint head of portfolio strategy and risk group at Temasek, and joint head for India. “Which is why we started reshaping our portfolio in 2011 to those areas which we think can give us long-term sustainable returns, which will include both public and private investments.”

“We don’t set a target on our mix of listed versus unlisted [assets],” adds Chia Song Hwee, president and joint head for Temasek’s investment and portfolio management groups, and Singapore. “If we do our job right, eventually some of our unlisted companies will be listed, otherwise we will not have liquidity back.”

GIC sombre about future returns amid high valuations, high uncertainty, low growth outlook

A day before Temasek’s review, the Singapore government’s fund manager revealed that it was just as circumspect as Temasek about the investment environment for the foreseeable future.

Uncertainty arising from geopolitics and policy risk has increased. Meanwhile, the protracted period of loose monetary policy has generated easy credit that induced more investors to take risk, driving asset prices higher.

“Valuations remain high across most major asset classes. Given the expectation of modest economic growth and earnings, this portends low returns over the next decade,” the GIC report notes.

On July 10, GIC reported a 20-year annualised real return rate of 3.7% above global inflation, noting that this meant the purchasing power of funds invested with it have more than doubled since 1997. Still, the rate of return was lower than the 4% it reported last year.

GIC noted that the 20-year period included two “very pronounced cycles”: the tech bubble that ran from the late 1990s to early 2000s, and the global financial crisis in 2008.

“This year’s decline in the 20-year real return was largely due to the drop-off of the high returns at the beginning of the tech bubble period, while the ensuing collapse in values remains within the 20year figure,” it said in its report. “We expect this effect to continue for a few years, dampening the rolling 20-year figure.”

A comparison of the asset mix in its portfolio from the year before shows a dip in emerging market equities, from 19% in FY2016 to 17% currently.

The share of developed market equities rose to 27% of the portfolio, from 26% previously.

Real estate and private equity made up 7% and 9%, respectively, while the rest was in cash and bonds.

In May, GIC pared its stake in Swiss private bank UBS, selling 93 million shares at an estimated loss of some US$4 billion ($5.5 billion).

On the other hand, it has moved into student accommodation in the US, UK, Europe and Australia. In 1H2017 alone, it has built up its exposure in the sector through a spate of multimillion dollar investments.

In February, it partnered UK student accommodation specialist Unite to invest £227 million ($404 million) in Birmingham, the UK. The following month, it acquired 45% stakes in three US student housing portfolios holding 39 properties. Barely two months later, in May, it paid some A$400 million ($424 million) for two blocks of student housing in Sydney, Australia.

GIC has also made substantial investments in Chinese companies, including US$500 million in Alibaba Group Holding; in ALT Group, which makes electrical vehicle systems; and NextEV, a Shanghai electric carmaker.

“The combination of stretched valuations, high policy uncertainty and unresolved economic imbalances explains our relatively cautious portfolio stance,” says GIC CEO Lim Chow Kiat.

Temasek Holdings positions for new economy

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