SINGAPORE (July 10): Temasek Holdings is positioning itself to ride six powerful trends, even as it prepares for tougher global market conditions in the year ahead.

At its annual review on Tuesday, Temasek noted that technological advances, demographic shifts and changing consumption patterns are disrupting traditional business models and creating new opportunities. It specifically 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 have led to investments in biopharma companies like Denali and AC Immune,” said Alpin Mehta, Managing Director, Investment at Temasek. Denali Therapeutics 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 have led to investments in companies like 17ZUOYE, an online learning platform; and Ctrip the largest online travel agency in China,” Mehta added. He went on to identify start-ups Temasek has backed like 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 Health 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 like Go-Jek and Airbnb are tapping into the sharing economy. Digital companies like Verily [Life Sciences], which uses big data to analyse healthcare trends; and BluJay [Solutions], a logistics software provider, are empowering a more connected world.”

This isn’t the first time that Temasek has reshaped its portfolio to focus on certain growth themes. Since 2011, it has been increasing its focus on the technology, life sciences, agribusiness, non-bank financial services and consumer sectors. “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,” Mehta said. During the financial year to March 31, Temasek invested a further $13 billion in these sectors. This was equivalent to nearly half the $29 billion in total new investments made during the financial year.

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.

Temasek was, of course, benefiting from a relatively benign market environment. Interest rates were low, and global growth was recovering. In fact, global stock markets continued running through 2017, even though there had been a general expectation at the end of 2016, as US President Donald Trump was elected, that the bull market had run its course. Among the strongest performers last year were the banks, partly on expectation of stronger profitability as interest rates rise. For instance, DBS Group Holdings, in which Temasek holds a 29% stake, saw its shares rise more than 46% in the year to March 31.

Temasek ended its financial year to March 31 with a net portfolio value of $308 billion, up from $275 billion a year ago. It delivered 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.

As at Mar 31, its 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%. Some 39% of Temasek’s portfolio was invested in unlisted assets.

Officials at Temasek struck a cautious tone on the outlook for global markets in the year ahead, on escalating trade tensions, rising interest rates and relatively high valuations. Against this backdrop, Temasek might slow its pace of investments over the next nine to 18 months, according to Mehta. On the other hand, the ongoing technological advances and disruption of traditional businesses could continue creating interesting new opportunities for Temasek.

“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 the portfolio strategy and risk group 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.”