Parliamentary Replies

Date: 23 March 2009

Question No. 957 (by Ms Sylvia Lim, Non-Constituency Member):

To ask the Minister for Finance (a) how the 25% fall in overall portfolio value from its peak is distributed over the different asset classes held by the Government of Singapore Investment Corporation; and (b) whether there is any form of accountability for fund managers who invested “too early” in failing banks.

Reply by Finance Minister Tharman Shanmugaratnam:

Recent fall in value

Ms Sylvia Lim’s question has to do with the 25% fall in GIC’s overall portfolio value since the peak that Chairman of GIC referred to recently. 25% is approximately the fall in value of GIC’s portfolio (in US$ terms) from the time global markets peaked in October 2007 until the end of last year.

The fall in value has reflected major declines in the global markets. Global equity markets have fallen by about 45% (using the MSCI World Index). Global real estate markets have fallen by 55% (based on the commonly used EPRA/NAREIT Global Real Estate Index). One of the few asset classes with positive returns over the period has been bonds – global bonds have gained value by about 6% (Barclays Aggregate Bond Index).

Almost all institutional investors have therefore seen large falls in their portfolio values. Norway’s NBIM (Norges Bank Investment Management), which is Norway’s equivalent of GIC, has lost around 27% (in US$ terms) from October 2007 to December 2008. The US university endowments reported average losses of 26% from July 2007 to December 2008.

Ms Sylvia Lim had also asked about GIC’s performance over the different asset classes during this period. GIC has on the whole performed on par with market portfolios based on a similar mix of asset classes since the peak in October 2007. But if Ms Lim’s question has to do with how GIC’s portfolio has been affected by its equity investments, including its high profile investments, the answer is that GIC’s overall equity portfolio has moved broadly in line with the relevant global equity market indices during the period - in fact it suffered a slightly smaller decline than the market indices. Fundamentally, however, it is not appropriate to assess the performance of endowment funds like the GIC or Norway’s NBIM over the short-term, or on the basis of individual asset classes or investments. We have to take the portfolio as a whole, and assess its performance over the long term – in other words, not over a year or two, nor from the peak to the trough of a single cycle, but across the market cycles. That is the mandate which the Government has given GIC – to secure good long-term returns on the overall portfolio.

In accordance with this mandate, GIC’s strategy is to allocate funds across a broad range of asset classes, including higher risk assets such as equities and real estate, with the aim of achieving good long-term returns. It invests in a diversified portfolio that takes into account the risk and return characteristics of each asset class, so as to achieve better returns for the combined portfolio over the long term. This strategy accepts that individual asset classes and investments may not always do well, but that taken together, and over a longer period, they must contribute to the good overall performance of the portfolio. In other words, GIC consciously accepts the risk that individual investments and asset classes may underperform, especially over the short term, because only by accepting these risks and diversifying its portfolio can GIC achieve better longer-term returns.

Hence during severe market cycles, we must expect to see significant fluctuations in GIC’s portfolio value like we have seen today. This also happened in 2001, when the equity markets collapsed.

However, GIC’s returns over the long term have been creditable by international standards. I fully understand why people are concerned about losses in the value of GIC’s portfolio in the current crisis. But the recent 25% decline in GIC’s portfolio value has to be viewed against the much larger investment returns that it has gained over the last 10 years - besides the more significant gains it has made over a longer period. In other words, despite seeing two major declines in portfolio value, in 2001 and in the current crisis, GIC’s portfolio has still grown significantly in value over the last 10 years.

GIC takes very seriously every decline in the value of its portfolio, including declines in its individual investments, in its tactical reviews. But it will have to keep to its fundamental strategy of diversifying across asset classes, accepting the risks of investing in riskier assets like equities and real estate, and investing for long-term gain. That is how it can make the most of its strategic advantage as a long-term endowment fund, and continue to deliver good returns over the longer horizon.

Accountability of fund managers

Ms Sylvia Lim also asked about accountability for GIC’s fund managers based on their performance. Each GIC investment manager and the fund management team as a whole are accountable for their performance.

GIC evaluates its investment managers regularly on the basis of several factors – the performance of GIC’s overall investment portfolio, how the team managing each asset class performs against specific market benchmarks or absolute return targets, as well as how the individual investment professional himself has contributed to the team’s performance. Consistent with GIC’s orientation as a long-term investor, the fund managers are evaluated not just on the performance of their portfolio within a single year, but on a continuing basis and measured against appropriate benchmarks.

Overall, the compensation framework supports a culture of responsibility and ensures that GIC is able to attract and retain the necessary talent to support its long-term performance.