RGE Monitor
12 Mar 2008
Rachel Ziemba
NB: This is the first in a series summarizing what is known about about key sovereign wealth funds. It begins with GIC, estimated to be the third largest sovereign wealth fund.
GIC invests a portion of Singapore’s reserves, its fiscal surpluses and Singapore’s mandatory retirement contributions. It does not disclose its assets except to say that they are well over $100 billion and that it aims to beat G3 inflation, which it did in the first 25 year of its history (to 2006)
Size of fund: GIC does not announce the size of its holdings, except to say that its assets exceed $100 billion – a claim it has been making since at least 2001. Estimates of its size vary from FT $140 billion to over $300 billion.
Brad Setser and I have estimated that GIC’s assets under management were over $200 billion at the end of 2007. GIC’s equity and fixed income investments are likely roughly equivalent to Singapore’s reported “portfolio investment” in the Net International Investment Position ($150 billion in 2006, the latest available data). Accounting for the approximately 20% of GIC’s portfolio in real estate and other alternative investments brings the total closer to $200 billion though.
A few caveats about this data: Net portfolio investment may also include private investments which would lower GIC’s assets. Alternatively GIC may manage a share of Singapore’s reserves (MAS assets)– which are reported separately in the NIIP.
Inflows: Singapore does not report transfers to GIC, but reported official portfolio investments in the balance of payments seem to be a good proxy. The cumulative increase in official portfolio investments exceeded $30 billion from 2001 to 2006 ($7.5 billion in 2006) and may reach $9 billion in 2007. Other official investments (likely including holdings of Temasek and state banks) are reported separately.
Asset allocation: In 2006, GIC’s asset allocation was thought to be 50%, 30% bonds, and 20% alternatives (private equity, property and commodities). It has disclosed holdings in 50 hedge funds, mostly Asia-based.
Strategy: GIC has been primarily a portfolio investor, taking relatively small stakes in a range of countries. As with some other funds, GIC seems willing to take on some larger stakes including $6.88b in Merrill Lynch, $9b in UBS, $1.5b in Italy’s Sintonia (the Benetton family holding company) and several property joint ventures in Europe and Asia. It was rumored to be the lead investor in a new TPG fund.
As a result, some analysts have suggested that the line between GIC and Temasek, Singapore’s direct investment arm, which holds its stakes in companies in Singapore and abroad, may be narrowing. Yet at present. Its stakes are much smaller than those of Temasek and all are far below controlling levels. Furthermore it declined the offer of a board seat offered by UBS, though it may exercise its voting stake in some cases.
Currency Composition: Since 2000, when US, EU and Japanese holdings dominated, GIC has reduced its dollar share and increased exposure to Emerging markets. By 2006/07, about 80% was invested in advanced economies -- 40-45% in the US, 25% in the EU and 8-10% in Japan. This means it has among the highest exposure to emerging markets among sovereign funds. About 10% has been invested in emerging Asia and the remainder may include exposure to non-Asian emerging markets as well as other G10 countries. Over the same period,Temasek has increased its holdings in AXJ which now make up 40% of the total portfolio – Assets in Singapore account for another 40% and OECD countries the remaining 20%.
Returns/Benchmarks: GIC’s stated goal is to achieve returns exceeding G3 inflation, which it claims to have done since inception in 1981. In 2006, GIC announced that its annual return averaged 9.5% in US dollar terms for the 25 years ending March 2006 or 5.3% above G3 inflation. GIC also claims to have exceeded the return on its benchmarks including the MSCI World Equity index and Lehman Brothers World Bond Index.
Governance: GIC’s board, called the “inner council” of Singapore’s government, approves the overall asset allocation, strategy and benchmarks to meet. GIC officials reportedly choose the countries and sectors in which funds are to be invested within those asset allocations. Singapore’s president receives the reports produced by Singapore’s auditor general.
Both the Monetary Authority of Singapore (MAS) and GIC have entrusted funds to external managers to develop Singapore’s asset management industry. About 25% of GIC’s assets are entrusted to external managers. Around 25% is managed externally – ie a similar share to that of Norway’s government pension fund in 2006 but a much lower share than the Abu Dhabi Investment Authority reports.
GIC has been one of few sovereign funds to suggest that it might increase disclosure as part of ongoing IMF SWF code of conduct discussions. Temasek already provides significant details about its assets and has done so for the last few years and has a AAA credit rating – as noted in the recent testimony before a US Financial services subcommittee hearing. Starting in December, GIC’s manager suggested that it might increase disclosure on relations with the government, internal governance, risk control and overall strategy – many of the areas that the EU mentioned in its suggested code of conduct. So what motivates this? – Today’s Kenneth Chang suggests it is prudence – and an opportunity to differentiate itself from other funds. It does seem that this is an opportunity for GIC to set some of the boundaries. And disclosing information could open more doors to investment and avoid onerous regulation. Singapore’s own population - who have raised some concerns about the over $20 billion invested in UBS, Citi and Merrill by GIC and Temasek – might appreciate knowing more about where the state invests its money.
http://www.rgemonitor.com/blog/economonitor/249284
