Singapore’s S$275 billion ($203.5 billion) state-run investment company, Temasek’s, decision to open an office in San Francisco last February shines a light on the giant fund’s evolving investment strategy.
Where better for an active equity investor that favours technology, life sciences and non-bank financial services so much that its investments in these kinds of disruptive sectors have grown from 8 per cent of the portfolio in 2011 to 24 per cent today?
The sovereign fund seeks stakes in companies carving out a competitive advantage and taking something that has been successful across borders to new markets. It particularly wants to capture growth in middle-income populations and transforming economies: US West Coast companies developing tomorrow’s products and services will sell them way beyond their domestic market.
Sustainability is another central theme and Silicon Valley is full of companies making the world a cleaner, friendlier and better place to live. In August, Temasek invested $75 million in Impossible Foods, a Bay Area technology pioneer making burgers out of alternative protein; just the kind of opportunity the fund is now in pole position to gobble up.
“I’ve had a few of their burgers, and even as a very longstanding meat lover, I can tell you they taste really good!” said Michael Buchanan, head of strategy and senior managing director at Temasek Holdings, speaking at the fund’s 2017 review.
Flexibility lies at the heart of the fund’s equity strategy, which is notably free of any targets. It doesn’t matter if a company is public or private, early or mature, and investment varies in concentration and duration.
This allows Temasek to pile into a particular country, sector or single entity as it likes. At present, 18 per cent of the entire portfolio is invested in chunky 50 per cent stakes in listed companies, including local mobile operator Singtel, which alone accounts for 12 per cent. Other large, listed investments include China Construction Bank, DBS Group and Standard Chartered. It’s a markedly different strategy to Singapore’s other giant fund, GIC Private (formerly the Government of Singapore Investment Corporation), where clear allocation bands and diversification are the norm. GIC manages $343 billion, the Sovereign Wealth Center states.
Trends still emerge
Beneath this fluidity, deliberate trends stand out. Equity investment is mostly characterised by long-term, concentrated stakes and the fund now allocates a growing proportion to unlisted companies: up from 33 per cent in 2015 to 40 per cent today.
“Since 2002, our unlisted investments have, on aggregate, delivered better returns than the listed ones,” explains Sulian Tay, who came from Goldman Sachs to join Temasek as managing director in 2012.
Temasek accesses unlisted equity via private equity funds and by investing directly in privately held companies.
“These include both early-stage companies and large mature ones,” Tay says.
Investments with managers have been instrumental in helping the fund gain insight into new markets, and have provided co-investment opportunities with other institutional players. But unlike some private-equity investors, Temasek doesn’t play a particularly proactive role as an owner. It prefers to leave business to management, eschewing actions such as pushing for corporate restructuring or changing management. It does, however, insist on “sound corporate governance” and diverse and independent boards at its portfolio companies.
Temasek favours mature economies, with a 60/40 split in underlying exposure to developed economies and growth regions, respectively. And it has steadily increased its allocation to the US from 9 per cent of assets under management in 2015, to 12 per cent today. But Asian bias still defines strategy at the fund.
A quarter of investment is in Singapore – Temasek is the biggest investor in a third of the companies in Singapore’s benchmark Straits Times Index – and 68 per cent of the portfolio is invested in Asia, where, apart from Singapore, China dominates.
“We continue to invest in China’s economic rebalancing,” Buchanan says, adding that fast-growing online sales and the shift towards the services sector are bright spots.
“As China becomes richer, households are spending a smaller share of their income on essentials like food, clothes and household items, and more on services such as recreation, education and healthcare,” he explains.
In 2011, banks represented almost all of Temasek’s exposure to financial services. Today, non-bank financial services, including insurance providers, new payment platforms and financial technology, have grown to S$9 billion ($6.6 billion) worth of investments, representing one-sixth of the financial services portfolio. Also in 2011, telecoms made up the vast majority of the technology, media and telecoms portfolio. Today, technology and media make up more than one-quarter of that portfolio, at S$17 billion ($12.4 billion).
“Both of these areas represent strategic shifts within a sector to rebalanced areas where we see opportunities growing,” Tay says.
The latest announcements from the fund do reveal another, more worrying, trend as well. High valuations and competition for assets in the last year resulted in Temasek divesting more than it invested, for the first time since 2009. Last year, it divested $18 billion, compared with $16 billion worth of investments, half the level of the previous year.
The fund doesn’t detail its cash holdings, but this suggests the dollars may be piling up, something other equity investors are also finding. Private-equity funds had $842 billion available for investment as of March 2017, alternative assets research firm Preqin says.
“Where we saw increased market valuations, we took the opportunity to divest into the positive momentum of some of our holdings,” Buchanan says. Key divestments included positions in US consumer lender Synchrony Financial, Indian telecoms group Bharti Airtel, building materials giant LafargeHolcim and German chemicals group Evonik Industries, along with part of a stake in Thai telecom group Intouch Holdings.
Temasek chief executive Ho Ching, the wife of Singapore Prime Minister Lee Hsien Loong, has been at the helm of the 43-year-old institution since 2004. Under her leadership, it has become a global investor run by 630 staff in 10 locations around the world; Temasek has also become an important investment itself, as others have sought to tap into its strategy.
The fund regularly issues debt, in an active bond program designed to increase its funding flexibility and expand its stakeholder base. Since 2005, it has issued 15 Temasek bonds with S$12.8 billion ($9.2 billion) in debt outstanding under medium-term note and Euro-commercial paper programs.
The portfolio isn’t managed in line with public market benchmarks, but Temasek usually outperforms market indices such as MSCI Singapore, MSCI Asia excluding Japan, and MSCI World. Robust equity returns last year produced a one-year total shareholder return to Singapore’s government of 13 per cent. Ten-year and 20-year TSRs are 4 per cent and 6 per cent, respectively, and since its inception, the fund has returned 15 per cent.
Tapping into tomorrow’s global champions promises more of the same.