Singapore offers a model for running sovereign-wealth funds well

Excerpts from The Economist's "How to reform the world’s biggest piggy-banks."

 On Singapore's approach and achievements:

Relative to the pack, Singapore is doing well. Its funds have assets of about $770bn—the exact figure is secret. They have made an annual return (in dollar terms) of about 6% over the past two decades, slightly more than an indexed portfolio with two-thirds of its assets in shares and one-third in bonds. Their income pays for a fifth of government spending. The funds are free of scandal and enjoy a solid reputation both in China and the West.

 

There is a clear division of labour. The central bank runs $290bn of liquid reserves. A national piggy-bank manager called GIC runs an estimated $250bn, long-term, diversified foreign portfolio. Then a holding company, Temasek, has the rest, keeping a quarter of its portfolio in stakes in Singaporean firms. It also makes punchy bets abroad.

 

On the funds’ boards sit a combination of officials, politicians and captains of industry; Singapore’s elite can sometimes seem too tightly knit. Yet overall governance is good. The city-state’s leaders view reserves-management as a national mission. Advisory boards and staff include lots of outsiders: 37% of the total employees of Temasek and GIC are foreign, versus under 10% at CIC. There is little evidence of Temasek meddling in the local champions in which it invests, such as DBS, a bank. In 2014 it did raise its stake in Olam, a struggling local commodities firm, but made a modest profit on the deal. In 2015 it unsentimentally sold control of Neptune Orient, a shipping line, to a French firm.

The fiscal framework is admirably clear. The reserves have special protection under the constitution. Under rules put in place in 2008, the government can spend up to half of the long-term expected annual real return of its net reserves each year. In practice this equates to about 1.6% of the funds’ capital value. The aim is to ensure that the pool of reserves and their income remain constant as a share of GDP over time, which Singapore has achieved; its capital is about 220% of GDP, the same as in 1997, The Economist estimates. While the official calculations are confidential, a rough estimate is that annual nominal returns would need to drop below 5.5% before the state eats into its inheritance.

Keeping on the Strait and narrow

Few countries have Singapore’s graft-free civil service and polity, which make technocratic excellence easier. And there are blemishes. The funds are now so big that there is more risk of pointless duplication. In June, for example, both GIC and Temasek invested in Ant Financial, a Chinese fintech firm. Mistakes happen: in 2007-08 both funds made some badly timed bets on Western banks. As Singapore’s population ages, state health-care costs will rise by almost one percentage point of GDP over the next decade. There will be pressure to raid the piggy bank, or for the funds to juice up their returns by taking bigger risks.