Monday, August 15, 2016

GIC sees lower returns, warns of tougher times

Rumi Hardasmalani

July 28, 2016

SINGAPORE — GIC warned that it could see low returns for up to 20 years partly because of an uncertain global economic and earnings environment, as the Republic’s sovereign wealth fund manager posted its weakest performance since 2013.

GIC, which manages well over US$100 billion (S$136 billion) in assets, produced a rolling annualised 20-year real rate of return — calculated after taking into account global inflation — of 4 per cent for the fiscal year ended March, down from 4.9 per cent previously.

In nominal US dollar terms, the return was 5.7 per cent over the same period, down from 6.1 per cent previously.

In its annual report, GIC cited higher starting valuations, the expected increase in historically low interest rates, and modest and uncertain growth fundamentals as reasons why it expects “low returns from markets over the next 10 to 20 years”.

“First, current valuations of assets are high, and … starting asset valuations are a good indicator of future returns. Second, the prevailing historically low interest rates are likely to rise over time, removing an important support for the currently high valuation of assets.

Third, the fundamental outlook for future growth and earnings is a modest one with great uncertainty,” GIC said.

“This will weigh on the prospects of asset returns,” it added.

At a briefing on Wednesday (July 27), Mr Lim Chow Kiat, GIC’s deputy group president and group chief investment officer, also warned that uncertainties brought on by the current low-yield environment will be protracted.

“These difficult investment conditions can stretch for the next 10 years. But GIC is prepared for this protracted period of all-time low interest rates, modest global growth prospects and high valuations of financial assets … Our investment framework and approach remain sound in the low-yield environment.”

Complicating the prospects for returns is a more uncertain outlook for economic growth, including high debt levels in both developed and emerging countries as well as rising income inequality, geopolitical tensions and the potential negative impact of disruptive technologies.

Against the backdrop of the United Kingdom’s exit from the European Union, or Brexit, Mr Lim said the UK market has adjusted in terms of currency movements, allowing for externally focused or export-oriented companies to perform better while those oriented towards the domestic market have suffered and will further go through a difficult phase.

“You have to individually look at assets (and strategise accordingly)”, Mr Lim said in response to queries on GIC’s strategic intent in terms of asset acquisitions in the UK given low valuations post-Brexit.

GIC’s portfolio mix in the fiscal year ended March stood largely unchanged across asset types, with nominal bonds and cash taking up the largest portion at 34 per cent, up from 32 per cent previously.

Exposure to developed market equities declined to 26 per cent from 29 per cent previously, while emerging market equities edged up to 19 per cent from 18 per cent.

Investments in inflation-linked bonds, real estate and private equity remained unchanged at 5 per cent, 7 per cent and 9 per cent, respectively.

In terms of geography, the Americas continued to be GIC’s largest market, accounting for 43 per cent of its total exposure.

The UK and eurozone accounted for 7 per cent and 12 per cent, respectively, while the Middle East, Africa and the rest of Europe accounted for 6 per cent of GIC’s portfolio.

Asia excluding Japan made up 20 per cent, while Japan alone took 11 per cent and Australasia accounted for 2 per cent.

Among its investments last year, GIC in May announced plans to invest £1.1 billion (S$2 billion) alongside four other institutional investors to acquire 33 per cent of the combined businesses of Three and O2 UK for £3.1 billion.

In July, GIC was part of a consortium that acquired Dutch car lease company LeasePlan. And in August, GIC along with Carlyle Group and a clutch of investors acquired Veritas, an information management systems provider, from Symantec Corp for US$8 billion in cash.

In November, GIC invested S$120 million in Chinese firm Bloomage BioTechnology Corp.

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