Singapore’s State Fund GIC  in its annual report today states that its annualized rate has dropped to 4 per cent for FY 2015-16. Dipped from 4.9 per cent a year ago, GIC suspects a low growth over the next decade due to plummeting bond yields and weak global growth.

GIC explained that the 4 per cent rate of return takes into account all major events that took place over the last two decades, including the Dot Com Bubble and Bust in 2000 and the Global Financial Crisis in 2008. The rate calculation based on a rolling return makes the firm attribute the allay partially to a bumper year in 1996 dropping out from the rolling 20-year return period. It underperformed its reference portfolio over a five-year period, returning 3.7 per cent in nominal US-dollar terms, compared to 4.6 per cent for its reference portfolio.

Valuations of financial assets are also high and returns based on starting valuations are low by historical standards. The company estimated that a portfolio comprising 65 per cent US stocks and 35 per cent US bonds is expected to generate real returns of 1 to 2 per cent over the next 10 years, below the historical average of 5.2 per cent.

Annualised Rolling 20-Year Real Rate of Return of the GIC Portfolio since 2001
Annualised Rolling 20-Year Real Rate of Return of the GIC Portfolio since 2001

More focus on cost reduction

The firm has been cautious with its investments for the past year, cutting the proportion of developed market stocks in its portfolio to 26 percent from 29 percent, and leveling up nominal bonds and cash to 34 percent from 32 percent. In what seems to be a defensive approach, it has increased its allocation to bonds and cash at the expense of some equity exposure.

GIC expects real returns be lower in a protracted period of all-time low-interest rates, modest global growth prospects and high valuations of financial assets. GIC Deputy Group President and Group Chief Investment Officer Lim Chow Kiat said the major challenges include high debt and an exhaustion of policy options, especially in the area of monetary policy.

Lim says the drop in GIC’s portfolio is due to a smaller allocation to developed-market equities, particularly the strong performing US stocks, than its reference portfolio. He said GIC would look for bargains during periodic spikes in market volatility, but also continued to see opportunities in private equity, real estate and infrastructure.

He further enunciated,

Our expectation is that going forward, the returns are very likely to be lower because the beginning valuation today is on the high side for most asset classes. We see limited growth, modest growth.

Asset mix of the GIC portfolio
Asset mix of the GIC portfolio

China’s role

Lim said services and technology sectors in China were attractive and that it was increasingly cautious about sectors with over-capacity. GIC doesn’t provide a specific outlook for its own investments but illustrates its performance against a so-called reference portfolio that represents the risk profile the Singapore government is prepared to take, comprising 65% U.S. equities and 35% U.S. bonds. The fund said it expects such a portfolio to return 1%-2% in real terms over the next 10 years, well below its historical average of 5.2%.

Lim said,

China is going through a very critical phase. As long as they do not implement SOE reforms in a decisive way, risk will accumulate.

For the next decade

Long-term returns are expected to be lower. High debt levels in both developed and emerging markets weigh on growth and reduce the effectiveness of policy. The global growth outlook is muted, with the risks from rising income inequality, disruptive technologies and negative public sentiment against globalisation and foreign investors complicating the picture.

Not revealing the exact size of its assets, GIC manages over $100 billion assets under management with its portfolio distributed across: developed market equities, emerging market equities, nominal bonds and cash, inflation-linked bonds, real estate and private equity. It has been an active investor in deals in sectors including infrastructure, property and technology. GIC is the 10th biggest sovereign investor, with about $343 billion worth of assets, according to Sovereign Wealth Centre.

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