SINGAPORE (July 15): The 12 months ended March 31, 2019 was certainly a challenging period for Temasek Holdings. The sovereign investment fund recorded a total shareholder return (TSR) of 1.49%, according to its annual review. This was down from 12% the year before, and 13% two years ago. The last time Temasek registered a similar performance was in 2012, though this is nowhere near the negative TSR of 30% and 9% recorded in 2009 and 2016, respectively.

One reason for the weaker performance was the market dip in the fourth quarter of 2018. This was driven by a slowdown across the globe — excluding the US — as a synchronised global expansion failed to maintain momentum during the year. The escalation in trade tariffs between the US and China only made it worse, leading to fears of a recession.

As a result, the Straits Times Index and MSCI Singapore recorded a negative total return of 2.8% and 3.2%, respectively, in the fiscal year, according to Bloomberg data. The MSCI All Countries Asia excluding Japan Index also registered a negative total return of 4.9% in the same period. The exception was the MSCI World Index, which climbed 4%.

Temasek’s defensive stance helped mitigate the impact of the market plunge on its performance. In particular, the investment holding fund seized the opportunity to take cash off the table, says Png Chin Yee, senior managing director of portfolio strategy and risk group head. Temasek recorded its highest divestments of $28 billion, compared with investments of $24 billion, during the fiscal year. This is the second time in the last 10 years that its divestments have exceeded investments.

“We went into the beginning of last year with the view that the US was late cycle, and that there was a risk of a recession. At that point in time, our fears were that, given the fiscal stimulus that was in place, the economy could overheat and that could prompt the [US Federal Reserve] to act preemptively to raise rates and that could cause the economy to tip into a recession. So, it was [with] that in mind that we actually stepped up our divestment pace and also moderated our investment,” she told reporters at the release of Temasek’s annual review on July 9.

Temasek also took the opportunity to rebalance its portfolio to minimise risks. It reduced its exposure to listed large blocs (of 50% and above) to 12%, from 15% a year ago. On the other hand, it increased its exposure to unlisted assets to 42% from 39% previously. However, it kept its liquid and sub-20% listed assets, which comprised mainly cash and cash equivalents, and listed blocs (20% to 50%) unchanged at 36% and 10%, respectively.” In terms of geography, the fund reduced its Singapore holdings — the largest in its portfolio — to 26% from 27% a year ago. This brought the local holdings to the same level as its China holdings, which were kept unchanged. Meanwhile, the investment fund increased its third-largest holdings, in North America, to 15% from 13% previously.

All in, Temasek recorded a net portfolio value of $313 billion, up 1.6% y-o-y, from $308 billion a year ago. Its longer-term performance continued to be less volatile as it recorded a rolling 10-year TSR of 9%, up from 5% previously. Over a rolling ­20-year period, Temasek registered a TSR of 7%, unchanged from last year.

Will the investment company continue to outperform in the long term? Will it do better in the current fiscal year? Where will it find opportunities amid risks ahead?

Higher unlisted asset allocation

The Fed’s decision last month to keep interest rates unchanged amid a global slowdown suggests that the US central bank is poised to ease monetary policy in the second half of 2019. This would have implications on major asset classes and financial markets around the world. As such, Temasek is expected to see its returns to be “much more challenged” in a low inflation and low interest rate environment, says Png.

As Temasek executive director and CEO Dilhan Pillay Sandrasegara explains it, such an environment would lead to more capital fighting for attractive yield-generating assets. This, in turn, would elevate valuations. “We have to be mindful of the fact that it’s going to be an expensive world out there and for the good quality assets, we have to find ways in which we can ensure that we get a long-term value from those investments,” he says.

Against this backdrop, Dilhan says Temasek would increase its exposure to assets outside the public markets. He adds that a significantly greater amount of allocation has been made towards alternatives, private equity, growth equity and venture capital in the last couple of years, and that it would continue. Temasek, he says, is prepared for the increased competition and will ensure that it is very focused on returns.

In 2011, its ratio for listed and unlisted assets stood at 80:20. This increased in favour of unlisted assets to 58:42 as at March 31, 2019. Asked how far it would venture into unlisted assets, Dilhan says it is not about the asset class per se, but where the opportunities are. “[If we] find more opportunities in the private space, we’ll go for that. We have, however, allocated more capital recently, or a little bit more capital, to early stage investing but that’s because we see trends which are happening.”

Early stage and new economy investments

These trends are longer lifespans, rising affluence, sustainable living, a more connected world, smarter systems and a sharing economy. “The six trends really try to address the convergence of different sectors in new things that are rising, where you see more convergence within science and technology,” Dilhan explains.

For example, Temasek has invested in Neoen, an international solar, wind and energy storage company. It has also invested a synthetic biology company called Pivot Bio and indoor farm operators such as Sustenir Agriculture and Bowery Farming, which operate in Singapore and the US respectively. Others include China-based cancer therapy company BeiGene, US-based neurodegenerative diseases therapy company ­Denali, US-based healthcare solutions provider for senior citizens Iora Health and Singapore-headquartered pan-Asian healthcare services platform Sheares Healthcare.

Dilhan says Temasek will invest in such companies as early as in the Series B round of funding. It makes these investments via its venture capital arm Vertex, which has assets under management of $3 billion. In fact, this was how Temasek came to invest in Impossible Foods, which develops plant-based substitutes for meat and dairy products. The fund has also invested in earlier-growth companies, such as ride-hailing firms OlaCabs and Didi Chuxing.

Altogether, these companies comprised 3.3% of Temasek’s portfolio. Dilhan says early-stage investments will not make up a significant portion of its portfolio, but getting in early allows it to exploit subsequent opportunities.

Opportunities in public markets

This, however, does not mean that Temasek is steering away from the public markets. On the contrary, it still sees opportunities in both the US and China, despite their unresolved trade conflict, in particular in companies that are domestic-oriented.

For instance, Temasek has been increasing its exposure to US companies in the payments space. “Obviously, if growth slows down, everyone is going to get impacted. But there are structural forces within the payments space which will drive away from cash to using digital payments such as e-commerce, [for example] the [US] government’s push to promote digital payments,” Png says.

Dilhan stresses that the US will remain an important market to Temasek. “There will be significant allocation of capital every year to the US and to areas that we see are focus areas for the future and in line with the six trends that we have identified,” he says.

In China, Temasek is looking at companies that are benefitting from the structural shift to a more consumption-led economy from an investment-led one. “When we first went into China, a lot of that was in the banks and in the recent years, we’ve moved away from just being involved in the banks to insurance — like I said, consumer, technology, life sciences. So, I think you can expect us to continue to evolve the portfolio in line with where we see greater growth opportunities within China,” says Png.

India is also an attractive market to Temasek. Png says the country’s rising affluence and institutional reforms should bode well for its economy, following Prime Minister Narendra Modi’s resounding re-election victory.

This story appears in The Edge Singapore (Issue 890, week of July 15) which is on sale now. Subscribe here