Friday, May 22, 2009

Dissecting Temasek

Temasek now has a professional outsider as CEO following Ho Ching's resignation. Of course you can put a spin on the motivations and pressures and developments which led to that. Herein lies the trouble with many big asset management unit. Is it a personality driven outfit? Is there just one person dictating matters? Safe to say that Temasek have very well paid sector leaders managing their portfolio. How does the asset allocation strategy work? Every company has their own culture and ways of doing things. For a proper fund manager to work well, they have to believe what they bought and believe that when they sell, its their call. Anything else that gets in the way would diminish the "empowerment" element.

Good fund managers need to have the autonomy, yes they can be part of the strategy exercise on capital, currency and asset allocation meetings... but when the decision to buy and sell arrives, it has to be the fund manager's call. If everything is collective, then in the end, there will be no responsibility, as it is collective. Fund management is such that somebody has to take the blame or the glory. If you pay someone good enough, they won't mind doing things collectively.

How strong a personality in dictating matters, will somehow cloud the brilliance and contribution of top fund managers. Good fund managers have to be accountable, and to be accountable you have to let them live and die with their decisions. The decision to appoint an outsider, Charles Goodyear (ex-BHP) as CEO indicates to me that the powers to be want to make the entire organisation more like a proper fund management unit. That proper processes and boundaries properly laid out in making investment decisions.

Rightly or wrongly, too many investing decisions by Temasek have been on "relationship basis" such as the Indonesian banks and the ill fated Shin Corp deal. I am guessing here but those looked like decisions being mainly pushed and promoted by one person. The second part was that there was no understanding and appreciation of the "cultural nuances" when investing in sensitive big companies in your neighbouring countries. You cannot just treat these decisions purely on assets and liabilities, and expect the rule of law to fall into place. Certainly a fund as big as Temasek should know what they can do, should do and should tread carefully ... to me, thats where Temasek failed spectacularly over the past 10 years.


Hence when markets fall, it is not surprising to see the value of Temasek’s portfolio falling as well. The figure above shows major global stock indexes – nearly all of them have dropped more than 30 percent in 2008, with some losing more than 40 percent. The (not shown in figure) MSCI (Singapore) and MSCI (Asia ex-Japan) stock indices are good benchmarks for Temasek’s performance: 31 percent loss against the 44 and 45 percentage losses suffered respectively. Furthermore, Temasek’s drop “is exactly in line with the MSCI world share index”.

Temasek is also not the only ‘sovereign wealth fund (SWF)’ to lose money. According to The Economist’s report on 22 January this year, “Gulf foreign-reserve funds and SWFs (the distinction is often blurry) lost $350 billion last year, or 27% of the value of their assets”. Though Temasek has failed to produce results, it has not failed spectacularly, giving assurance to the public their money has not been squandered away. In fact a 31-point loss is arguably a better performance, given the context of the market.

Finally, Temasek is not plagued with structural financial problems. While it may have bled money in Barclays and Merrill Lynch, and also encountered problems with Shin Corp and the Indonesian government, it has made other sound investments too, such as in the Bank of China and China Construction Bank. Its losses are likely to be reversed once the recession ends, the banking system is fixed, and investors are once again confident in the markets. Public anger directed at Temasek over its losses, if any, is unreasonable – Temasek is not an immediate failure.

While the Western financial world fears an onslaught of SWFs with hidden agendas, Singaporeans fear that Temasek has skeletons in its closets. There are three broad categories of problems which Singaporeans can express some reasonable suspicions: Temasek’s lack of transparency, soundness of its investment strategy and Temasek’s relationship with the giant local companies here.

The first problem is a recurrent theme. A recent Wall Street Journal article summed it up nicely

“it has never provided historical financials to back up its claim of an 18% compounded annual “total shareholder return” by “market value,” nor has it released detailed results showing how money flows among its subsidiaries, the holding company and its government shareholder. Temasek outlines its compensation arrangements but doesn’t say how much it pays its top executives”.

What is the definition of ‘transparency’? Should Temasek publish its consolidated financial report like any other listed company, not just its summary – which is already quite detailed in stating its goals and investments? What stuff do Singaporeans want to see which is not publicly available?

The essence of this transparency issue is not regarding Temasek’s financial status, but more on its vague goals and the perception that it is a government-run body.

Temasek should be transparent for its own good – a pragmatic and financial purpose. Together with the GIC, they can detail their internal workings, goals and strategies to create a force of certainty and stability in the financial market. If Temasek, for no known reason, decides to give up its stake in a company, it will lead to speculations, rumours and uncalled panic, and Temasek will eventually be affected. More importantly, political tensions can be reduced in sensitive investments, as it has learnt in Thailand. Surely such benefits of transparency can better achieve its bureaucratically-crafted goal, “maximise long-term shareholder value as an active investor and shareholder of successful enterprises”?

The second problem is the soundness of Temasek’s investment strategy. Some have criticised it for pursuing a ‘high-risk strategy’, and so expose Singaporeans’ money to unnecessary losses. Temasek is not a low- or high-risk investor. Stashing money in fixed deposits or bonds are safe, but may not secure high returns. Similarly, pumping money into hedge funds or real estate speculation may offer higher returns, but Temasek is unlikely to be doing that. It is more likely Temasek is a mid-risk investor which made some bad decisions in Barclays and Merrill Lynch (Temasek’s losses cannot be fully attributed to just these two banks; as mentioned, it depends on the performance of stock markets worldwide).

Temasek holds stakes in companies in diverse sectors, ranging from financial services to consumer lifestyle to technology. Critics will jump at this again, arguing that diversification ought to act as a shock-absorber. However, 2008 was an unprecedented year where everything seemed to be going downhill. Even diversification may not work in such exceptional times, when confidence level is zilch in the market; but it will probably work once the economy recovers.

With the appointment of Charles Goodyear as chief executive, it looks set to diversify into asset classes such as commodities, where he has had experience. Benefit of the doubt can be extended to Temasek over its investment strategy, and Singaporeans need not be anxious that aggressive, high-risk investments will bleed them.

The third problem is the consistent link drawn between Temasek and companies where it is a stakeholder. Singapore’s commanding heights – the telecommunications, energy, industrial, transport and banking sectors – are anchored by local firms such as Singtel, Mediacorp, Singapore Power, SembCorp, PSA, SMRT and DBS. Some of these local firms were originally owned by the Singapore government to stimulate the growth of new industries, which then cut a route for private capital once viability was shown. As the economy grew, the government transferred part or all shares to Temasek, which is supposed to be an investment manager for the Ministry of Finance.

Temasek has stated clearly it is not involved in the commercial running of its companies. The evidence suggests so: in 2002, a battle was fought between DBS and 98 Holdings for NatSteel. Though Temasek owned shares in all three firms, there is no evidence to show it was the puppet master of this saga. Furthermore, Temasek firms such as SembCorp and Keppel compete actively against each other in their respective fields. Yet there are lingering doubts, especially when one of Temasek’s ‘investment themes’ is to ‘deepen comparative advantage’ – one can guess it means the ‘national champions’.

Singaporeans should be more rightly concerned at the government’s tendency to pick winners. The government’s current role in the economy is most prominent in their attempts to nurture dynamic comparative advantage in promising industries. Other countries do so through protectionism or creating state-owned enterprises to monopolise the industry, but Singapore does it through fiscal incentives and infrastructure investments to attract FDI. Electronics, pharmaceuticals, tourism, digital media etc – these industries are not grown from the bottom, but deliberately nurtured from the top.

The problem with this is not the government’s inability to pick winners – pharmaceutical output was partly responsible for vigorous growth before last year – but economic development in Singapore has reached a stage where orderly planning may not lead to the next frontier. Technological innovations and capital stock accumulation are required to expand the economy’s productive capacity; attracting FDI has done a fine job, but the next step must be taken. Singapore needs to unleash the local, so-called ‘creative forces’ for long-term growth.

Temasek is a prime example of the government’s belief of orderly mobilisation of resources to tap on market forces. Temasek’s grip on some local giants such as Mediacorp and Singapore Power may be essential for national security reasons, but ownership and control of the vital companies by foreign firms can be limited through regulations. But from a commercial perspective, Temasek owns shares in them simply because they are profitable. Not everyone believes so, again, due to their image problem of being government-directed.

Temasek and the local giants symbolise the sometimes unfathomable economic thinking of the government. On one hand, it says it does not interfere in the commercial running of national champions; on the other hand, its continued stakes in them evokes a nagging feeling the government believes such firms should still be tied to their aprons, for unknown reasons. The Singapore government combines a strange mixture of socialist and free-market thought in the economy –national champions, state-led planning, heavy public subsidies on housing, healthcare and education; free-trader, fiscally conservative and aversion to welfare as to polyesters.

To be sure, Singapore’s development can be identified as ‘dirigisme and free markets’. But it is time the state reduces its direct influence. Signs have been encouraging; the government decided on two casinos, and both are now being built by foreign firms, not TLCs or GLCs. The ‘creative forces’ can come from both local and foreign, but it’s unlikely they will come from the government.

p/s photos: Reiko Azechi

1 comment:

see said...

I see Temasek's loss more of an asset allocation problem. They have to be clear on their objective, whether they want lower returns but lower risks. Making a 40% allocation to financial companies looks like taking a huge swinging bet to me akin to some hedge fund strategy.

As for no transparency, that has always been the case. During the Asian crisis, M'sia was the fav whipping boy on no transparency by the shrilling foreign media but not even a squeek about GIC or Temasek. Heck even the GIC office building has no windows! (at least they didnt have any 10 years ago)

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