GIC seeks discipline, diversification in ‘profound uncertainty’ ahead

Singapore’s sovereign wealth fund GIC is bracing for a period of “profound uncertainty”, as the fund looks to rely on more “granular” diversification and maintaining price discipline to traverse the environment.

In its 2023/ 2024 annual report the fund’s chief executive Lim Chow Kiat warned there are “no maps” for investors to navigate the volatility ahead, and the fund is looking to play into its strength as a provider of long-term capital.

The report said that several key markets had priced in a very positive outcome for the macroeconomic environment since the short-term probability of recession in the global economy had been reduced. Lim highlighted the benefits of nimble capital and a more bottom-up approach in this environment.

“Credit spreads in the US and Europe, in particular, are below or close to their lowest quartile in the past decade,” the report read. “However, there is a wide dispersion across markets and within asset classes.”

“This dispersion favours a more bottom-up approach, alongside more nimble capital allocation across different opportunities.”

In the report Lim said many markets are primed for a Goldilocks economy and “have not yet priced in the level of uncertainty investors face”.

“It is a plausible scenario, but only one of many,” he said.

“This signals a potential mismatch between investor confidence and the range of plausible outcomes.

“In such an environment, GIC must practise price discipline.”

The fund indicates that it intends to remain level-headed in the well-documented AI hype, as Lim said some early-stage AI businesses are commanding a lofty valuation.

“Hardware makers, including semiconductor firms and the infrastructure layer businesses such as cloud platforms, have less downside, though their valuations have also expanded recently,” he said.

“Each case requires careful assessment of its potential risk-return trade-offs.”

GIC has a total portfolio approach and when it comes to diversification, its process is to start with understanding of the real underlying risks, then stress test different combinations of investments in various amounts.

Lim said the fund won’t stop at diversifying on an asset class level but really digs into the “granularity” of investment opportunities, especially in private markets where the fund has built comprehensive capabilities over the years.

“Take real estate as an example. We have picked our spots across different sub-sectors — including data centres, student housing, and logistics — and different geographies,” Lim said.

“In a world where uncertainty has shaken the foundations of the investment environment, our response is to be ever more sure of who we are and to abide by our core investment principles.”

In the year to March 2024, GIC cut exposure to nominal bonds and cash by 2 per cent while upped allocations to inflation-linked bonds by 1 per cent. Private equity is also occupying a bigger part (up 1 per cent) of the portfolio due to capital deployment and returns.