SINGAPORE (July 23): Temasek Holdings and GIC have released their annual reports in the past week, so it is a good time to take a step back and think about how they have been doing. One issue is, of course, their financial performance, which continues to be good and well ahead of their respective mandates. But there is an overarching issue that is more important and deserves a deep review — is the overall management of our national assets structured optimally?

Have our sovereign wealth funds delivered good returns for the risk they take?

Before we look at this, it is really important for us to understand the notion of risk-adjusted returns. A fund can always reach for high returns by taking on a lot of risk but that may not be what it is mandated to do by its clients. Returns must be viewed in the context of the risks taken — if clients prefer a less risky approach, they have to be satisfied with lower returns. A fund should not be marked down because its returns are lower than another fund that is allowed by its clients to take on a lot more risks.

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