GIC cuts developed allocations as growth slows

The Government of Singapore Investment Corporation (GIC) will continue to increase its allocation to emerging economies and cut back on its exposure to developed markets because of concerns over slowing growth.

GIC, which manages $100 billion of the island state’s reserves, said in its annual report that it had achieved a 20-year annualised return of 7.2 per cent in US dollar terms by the end of March.

During the previous year to end of March, GIC had decreased it allocation to developed markets from 41 per cent to 34 per cent, while increasing its allocation to emerging markets from 10 per cent to 15 per cent of the portfolio.

“The developed economies, in particular the United States and Europe, are recovering from the global financial crisis,” Ng Kok Song, GIC’s chief investment officer (pictured) said.

“However their longer term outlook is still uncertain and carries considerable macro financial and economic risks. While the emerging economies in Asia and Latin America are growing strongly, their policy makers face challenges in restraining inflationary pressure and currency appreciation.”

The fund also achieved a marginal improvement on its annualised real return, in excess of global inflation, which increased to 3.9 per cent for the year ending March compared to 3.8 per cent for the previous 12 months.

For the first time the fund released nominal returns over the previous five years and over the last decade. Annualised returns for the past five year were 6.3 per cent net of fees with a volatility of 12 per cent. In the last 10 years the fund achieved an annualised return net of fees of 7.4 per cent with volatility of 10 per cent.

It contrasted these returns to two composite portfolios consisting of a 60-40 equity/bond split and a 70-30 equity/bond split.

The rates of return for the composite portfolios were calculated using two indices – the MSCI All Countries Gross Total Return index for global equities and the Barclays Global Bonds Aggregate Index for Global Bonds.

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Ng attributed the returns to the recovery in equity markets.

GIC invests almost all of its assets overseas. It flagged its intention to increase its exposure to emerging markets as far back as 2003, when it classified emerging market equities as an asset class in their own right.

In further asset allocation changes last year GIC increased its allocation to bonds from 20 per cent last year to 22 per cent this year.

GIC also marginally lifted its alternatives’ allocation to 26 per cent of the portfolio.

Within alternatives GIC’s real estate holdings ticked up from 9 per cent to 10 per cent. Private equity and infrastructure stayed steady at 10 per cent, as did natural resources and absolute returns which were both 3 per cent of the portfolio.

Cash decreased from 4 to 3 per cent.

Ng said the fund was looking to diversify its holdings across a number of countries and this has led the fund to reduce its European equity holdings from 30 per cent in 2010 to 28 per cent and its US holdings from 36 per cent to 33 per cent.

The fund – which is tasked with using foreign reserves and budget surpluses to provide a buffer against future crisis and meet spending needs – doubled its investments in Latin America from 2 per cent to 4 per cent.

Asia saw the biggest increase in investment from the sovereign wealth fund, with GIC investing 27 per cent in Japan, China and Hong Kong, South Korea and Taiwan compared with 24 per cent last year.

The fund has also seen recent changes at board level.

In May, former Singapore Prime Minister Lee Kuan Yew stepped aside as GIC chairman for his son, Lee Hsien Loong, who is the current Prime Minister. Lee Kuan Yew will stay on as GIC senior adviser so, as the fund says, it can “have the benefit of his vast experience, extensive network of contacts, and geopolitical insights”.

In June GIC deputy chairman and executive director, Tony Tan Keng Yam resigned. GIC director, Lim Hng Kiang, was appointed as acting chairman of the fund’s real estate arm and director Ang Kong Hua was appointed acting chairman of GIC Special Investments.

GIC is currently conducting a search for a replacement executive director.