SINGAPORE (July 16): During the early years of this newspaper, I rarely made space in our pages for Temasek Holdings. While we actively covered the many public-listed companies in which it held major stakes, doing a story on Temasek itself seemed to be more trouble than it was worth. A former colleague once demanded to know why I would not make a page available for the state-owned investment company run by the wife of Singapore’s prime minister. I remember thinking to myself that his question was precisely the problem.

Over the last few years, I have changed my mind about the need to cover Temasek, for two reasons. Firstly, since Budget 2016, Temasek has been included under the net investment returns framework, which allows the government to spend up to 50% of its expected longterm returns. The NIR framework, which was implemented in Budget 2009 for GIC and the Monetary Authority of Singapore, replaced the previous net investment income framework, under which the government could only spend investment income comprising dividends and interest.

For the current fiscal year, the government is expecting total NIR contribution of $15.85 billion. That is more than the $15.11 billion the government expects to rake in from corporate tax, which is the single largest operating revenue item. In fact, the NIR contribution is equivalent to 19.8% of the government’s total projected expenditure of $80.02 billion. In short, Singapore is now heavily reliant on NIR contributions, including from Temasek, to fund its budget. That makes understanding Temasek increasingly important to investors who are tracking the Singapore economy.

The second reason Temasek is becoming more interesting is because of its leadership in identifying and developing exposure to emerging and high-growth industries. For instance, since 2011, it has been increasing its focus on the technology, life sciences, agribusiness, non-bank financial services and consumer sectors. At its annual review this past week, Temasek noted that it invested a further $13 billion in these sectors during the financial year ended March 31. This was equivalent to nearly half the $29 billion in total new investments made during the financial year.

“Together, these focus areas made up 26% of our overall portfolio. And, that’s up from just 5% of a much smaller portfolio seven years ago,” said Alpin Mehta, managing director of investment at Temasek, during a press conference this past week. Mehta said that investment returns from Temasek’s investments in the consumer sector were generally in line with its overall portfolio return, but investment returns from technology, non-bank financial services, life sciences and agribusiness have outperformed strongly. “Our annualised return across these focus sectors is more than two times our portfolio returns,” Mehta said.

Riding disruption

The next few years could be especially interesting for Temasek, in my view. Stock valuations have been pushed up substantially over the last couple of years, and interest rates are now rising. There are also growing concerns about a trade war affecting global economic activity. Indeed, officials at Temasek struck a cautious tone on the outlook for global markets in the year ahead, and indicated that Temasek might slow the pace of investments over the next nine to 18 months.

On the other hand, Temasek is also positioning itself to ride the technological advances, demographic shifts and changing consumption patterns that are disrupting traditional business models and creating new opportunities. It has identified six themes that are now guiding its investments: longer lifespans, rising affluence, sustainable living, smarter systems, the sharing economy and a more connected world.

“For example, the opportunity created by longer lifespans has led to investments in biopharma companies such as Denali [Therapeutics] and AC Immune” said Mehta. Denali and AC Immune are both Nasdaq-listed pharmaceutical companies focused on treating neurodegenerative diseases. “Similarly, the combination of rising affluence and advancing technology in emerging markets has led to investments in companies such as 17ZUOYE, an online learning platform; and Ctrip, the largest online travel agency in China,” Mehta added.

He went on to identify startups Temasek has backed, such as China-based electric vehicle manufacturer NIO and alternative meat producer Impossible Foods, as being well-positioned to meet the increasing demand for sustainable living. “Likewise, Global Healthcare Exchange and Intapp, a software provider for the legal profession, are examples of companies that develop smarter systems,” Mehta said, referring to more start-ups backed by Temasek.

“Peer-to-peer networks such as Go-Jek and Airbnb are tapping into the sharing economy. Digital companies such as Verily [Life Sciences], which uses big data to analyse healthcare trends, and BluJay [Solutions], a logistics software provider, are empowering a more connected world,” he added.

“Our focus is to look at more private market opportunities where we see true value and that fit with our themes,” said Rohit Sipahimalani, joint head of portfolio strategy and risk at Temasek. “We are also looking for opportunities where we feel we can add value to our portfolio companies. That is what’s going to differentiate us.” He added that Temasek’s presence in Asia could make it a useful backer of technology companies in the US and Europe. “We feel that we can help them navigate as they look to Asia as a market.”

As at March 31, Temasek’s two largest geographical exposures were to Singapore and China, accounting for 27% and 26% of its portfolio, respectively. The rest of Asia accounted for a further 15% of its portfolio. North America accounted for 13% and Europe 9%. Temasek’s largest exposure by industry was financial services, at 26%. Telecommunications, media and technology accounted for 21%. Consumer and real estate made up a further 16%. About 39% of Temasek’s portfolio was invested in unlisted assets.

Temasek ended its financial year to March 31 with a net portfolio value of $308 billion. It achieved total shareholder return of 12.19% for the financial year. Its annualised total shareholder return over the last 10 years and 20 years were 5% and 7%, respectively.

Remaking opportunity

Temasek was created in 1974 to house a clutch of companies owned by the government. Many of those legacy assets are still part of its portfolio. Among them are DBS Group Holdings (originally Development Bank of Singapore) and Singapore Airlines. Meanwhile, the Jurong and Keppel shipyards are now part of Sembcorp Industries and Keppel Corp, in which Temasek holds commanding stakes. Other major locally listed companies that count Temasek as a major shareholder today include Singapore Telecommunications, CapitaLand and ST Engineering.

These big public-listed companies have each gone on to forge identities of their own, complete with highprofile top executives accountable for their own performance. Meanwhile, Temasek is still struggling to dispel some longheld perceptions. A brochure published in conjunction with its annual review this past week includes a flow chart of where its investment funds come from and where they go. The diagram includes a red box that specifically states Temasek does not manage Central Provident Fund savings, government reserves or foreign reserves.

However, if its focus on the big themes that are reshaping the world pays off, Temasek could be presented with an opportunity to remake its own image. And, if the talent within its ranks is eventually encouraged to go on to form their own firms, Temasek might be remembered for spurring the development of Singapore as a global asset management and capitalraising centre rather than just a steward of the government’s assets.

This article appears in Issue 839 of The Edge Singapore (week of July 16) which is out this week. Subscribe here.