Singapore’s GIC records its worst five-year performance in nearly a decade

Singapore’s sovereign wealth fund, GIC, has reported its poorest five-year returns since 2016, posting annualized nominal returns of 3.7% for the five years ending 31 March.

GIC’s disappointing fiscal year reflects the downturn in equities resulting from efforts to curb inflation and the impact of Russia’s invasion of Ukraine. The returns also take into account major events such as the Covid-19 pandemic and escalating great power conflicts, but do not include the recovery since March.

The fund attributes the sluggish global economy and rising interest rates as contributing factors. GIC’s Chief Executive Officer, Lim Chow Kiat, issued a warning that the economy and markets are still experiencing the fallout from policy tightening. “We are not out of the woods yet,” he cautioned, “The consequences of the policy tightening are still being felt in the economy and markets.”

Despite the disappointing short-term results, the fund managed to achieve an eight-year high of 4.6% for its 20-year annualized real rate of return, marking its highest point since 2015. GIC does not disclose one-year results or the value of assets under its management.

The strong performance on the longer-term scale was largely due to the omission of a weak year in the early 2000s from the rolling computation window, which positively impacted the key return metric.

To navigate these challenging times, marked by soaring inflation, geopolitical unrest, and aggressive monetary policy tightening, GIC plans to continue focusing on investment opportunities that offer stable long-term returns, notably in the infrastructure field.

Jeffrey Jaensubhakij, GIC’s Group Chief Investment Officer, states that investments in infrastructure provide “inflation-protected returns,” a valuable asset in an uncertain environment. The fund is specifically focused on businesses that generate stable, predictable, and often inflation-linked cash flows across macroeconomic cycles.

In response to the global shift toward green energy and the digitalization of the economy, GIC sees a growing demand for new infrastructure such as fibre networks, data centres, and green power generation and storage. Since 2016, the fund has quintupled the size of its infrastructure portfolio, committing annually between US$10 billion to US$20 billion across six continents.

As a result of this increased emphasis on infrastructure, the fund’s real estate allocation rose to 13% as of March 2023, up from 10%. Allocations to emerging market equities have also risen by one percentage point to 17%, while those to developed market equities have decreased to 13%. Cash now accounts for approximately a third of the portfolio.

Despite the unsettling short-term losses, GIC continues to maintain a cautious investment stance. Its diversified portfolio offers some cushion against market corrections. Nominal bonds and cash, traditionally viewed as safer investments, still comprise the largest share of the portfolio at 34%, albeit down from 37% a year ago.

The losses suffered by GIC could be significant. The fund’s portfolio is estimated to be worth S$1,237b ($1,046b estimated in February 2022, with an additional $191b transferred to GIC by the Monetary Authority of Singapore in FY2023). Thus, the potential loss could amount to around S$74.6b, based on a -6.03% return ($1,237b x 6.03%).

This figure is derived from last year’s return for a 60/40 portfolio (comprising 60% MSCI World and 40% FTSE World Government Bond – Developed Markets (Hedged EUR)), which was -6.03%.

If the 37.9% global stock market loss in 2002 is discounted and the 20-year annualized return last year rose from 4.2 to 4.6%, the actual loss may be higher than the current estimate. This latest development places GIC, and by extension, Singapore’s financial landscape, in a precarious position.