GIC posts 3.9% 20-year annualized real rate of return, weakest investment gains in four years

Singapore’s Sovereign wealth fund GIC reported a decline in returns for the past financial year and cautioned that “profound uncertainty” will continue impacting future returns.

Despite this, GIC plans to leverage its strengths and explore new opportunities amidst the volatility, including investments in climate transition.

In its annual report for 2023/2024, released on Wednesday (24 July), GIC disclosed a 20-year annualized real rate of return of 3.9% for the year ending March 31.

This is a decrease from the 4.6% reported last year, the highest return since 2015.

The 20-year metric, a key indicator of GIC’s performance, reflects a “rolling” return in which years are added and removed as the computation window progresses.

For FY2023/24, this figure represents the average annual return of GIC’s portfolio from April 2004 to March 2024, adjusted for global inflation.

The report notes that this year’s 20-year return saw the strong performance from April 2003 to March 2004—when equity markets rebounded from the dot-com crisis—drop out of the rolling window.

GIC, one of the three entities managing Singapore’s reserves, oversees US$770 billion in assets, according to estimates from the Sovereign Wealth Fund Institute.

While GIC does not report its annual performance, its 5-, 10-, and 20-year returns showed relatively minor changes.

The annualized 20-year nominal return dropped to 5.8% from 6.9% a year ago, whereas the annualized 5-year nominal return rose slightly to 4.4%.

GIC report noted that despite the resilience of the global economy in 2023, supported by a slowdown in inflation and robust performance in risk assets, increased enthusiasm for generative artificial intelligence also contributed to gains in the tech sector.

However, geopolitical risks escalated with the continuation of the Russia-Ukraine war and the outbreak of conflict in the Middle East in October.

“The resulting spectre of commodity and supply chain disruptions heightens the risks of resurgent inflation and lower growth,” the report stated.

CEO Lim Chow Kiat noted in the report that uncertainty has reached a “profound level” in recent years, challenging the foundational assumptions of the past four decades.

He highlighted political instability in some countries, rapid technological advancements, and climate change as key factors.

“It is no longer sufficient for investors to only consider where we are in the macroeconomic cycle or the future path of interest rates.”

“This unprecedented uncertainty translates into a wider range of possible outcomes. Pitfalls and windfalls await in equal measure, ” Mr Lim added.

Lim cited the climate transition as an example of how GIC’s long-term flexible capital can make a significant impact.

Investors are beginning to realize that financing the transition may entail short-term opportunity costs they are unwilling to bear, resulting in fewer exits and a decline in venture and growth investments in the sector.

However, a team within GIC’s private equity department identified companies needing funds to scale up “first-of-a-kind” projects that typically fall outside traditional capital allocations and launched an investment program for green assets.

“Patient capital like ours is well-suited to navigate climate tech’s potential J-curve,” said Lim.

GIC Chief Investment Officer Jeffrey Jaensubhakij highlighted nuclear fusion as an example of a long-horizon investment.

The fund invested in a nuclear fusion company around three years ago, with the technology still being eight to ten years away from fruition.

GIC reported that tight monetary policy in the US, China’s property market issues, and heightened geopolitical tensions make the global investment environment challenging.

“Moreover, medium-term return prospects remain low, and risk-reward less favourable, given elevated valuations across many risk assets, particularly in developed markets,” GIC added.

However, it noted that the faster adoption of AI could drive higher productivity growth.

While the global economy has shown resilience, this can slow the disinflation process.

Some major central banks have delayed their plans or done less than expected, said GIC.

“If inflation proves more persistent than expected and even increases, core central banks may not only have to keep rates higher for longer but potentially raise them,” the report said.

“This would increase recession risks and put strains on households and businesses already struggling with high borrowing costs.”

According to its report, GIC’s exposure to the U.S. increased to 39% of its total investment portfolio for the year ending March 31, 2024, up from 38% the previous year.

Exposure to the U.K. and Eurozone rose to 5% and 10%, respectively, from 4% and 9%.

In contrast, exposure to Japan and Asia (excluding Japan) decreased to 4% and 22%, down from 6% and 23%. The report does not disclose China’s share.

As China experiences slower economic growth, GIC noted it is becoming more selective and exploring opportunities in advanced manufacturing, industrials, and niche areas like residential-for-rent businesses.