Thursday, May 21, 2009

Gov Of Singapore Investment Corp's State Of Affairs


Investors and the general public whacked Temasek and GIC royally over their portfolio losses over the past 12 months. Please search and distinguish between GIC and Temasek (you can get previous postings on that by keying in Temasek or GIC on this site's search button above). I was very severe on Temasek, and rightly so, they performed well when the wind is beneath their wings, and they made rather exceptional sector bets. For all the good brains and minds money can buy, not ONE was able to predict the banking crisis, the property loans debacle, the excessive credit card debt phenomenon, etc... That indicated to me that they just read analyst reports with no desire to walk the data (the need to go to the ground, talk to the participants and see how things were done). All they needed to do was talk to some of those new borrowers, check with ratings agencies on how they rated the papers, how did the papers got their triple A rating, etc. If you are going to invest $1bn into IOI Corp, you should not only talk to management, but walk around the plantations, see how they actually managed them, how the staff behaved, what they do to stop pilferage, how do they hedge their positions, how do they do their forward sales, how they go upstream and downstream, talk to a few of their major suppliers and clients, etc... Temasek and to a certain extent GIC, did not do the dirty work.

Again, Temasek hastily sold its Bank of America stake recently, and the share price has almost doubled what they sold at within weeks. At least GIC had the good sense to ride out bad decisions. If anything, one should be looking to buy now, not sell. Yes, they should NOT have bought before, thats too late to rectify, now they should be looking at their prospects moving forward. Unless Temasek really thinks that Bank of America has a greater chance of going to $4.00 than $25.00 over the next 2-3 years, then sell... what Temasek is doing to cutting off both limbs to get rid of an ugly mole.

Anyway, here is a more tolerant view on GIC and how they do things a lot better than Temasek. Take note of the personalities behind these two vehicles to understand the nuances in management and genuine ability.


The Government of Singapore Investment Corporation (GIC) says it will maintain its investments in Citigroup and UBS, despite the gloomy outlook for Western financial institutions.

This comes days after news that Temasek Holdings had sold its stake in Bank of America (BOA), resulting in an estimated loss of several billion dollars.

GIC currently has an 11 per cent stake in Citigroup, while its stake in UBS amounts to about nine per cent.

Observers say UBS and Citigroup have significant holdings in Asia and other high growth regions, which could recover more quickly from the downturn. And this could benefit GIC in the long term.

Arjuna Mahendran, Head of Asia Investment Strategy, HSBC, said: "By investing in these two very large investment banks, an investor who has a strategic holding in the equity of those banks would perhaps have access to the deal flow that emanates from their investment banking operations. And that is a huge positive if you are running a large sovereign wealth fund."



  • GIC manages well over $100b from country's forex reserves and fiscal surplus - estimates of its assets under management range from $140- $300 bn. A plausible estimate is $220b in mid 2008
  • Lee Kuan Yew suggested that GIC's assets had fallen by 25% from the peak and GIC invested too early in Citi and global banks. It's equity allocation has fallen to 45-50%. Other estimates suggest it lost $33b in 2008. It started to possess 7% more of cash in mid-2007
  • A 25% losses would actually mean it outperformed global equity and had losses perhaps slightly less than other SWFs with similar portfolios
  • Returns: It has averaged annual returns of 7.8% for last 20 years (slightly above the benchmark MSCI global with 7% returns) with Asian crisis, tech bust and credit crisis depressing returns in recent years. Average annual return in 25 years ending in 2006 was 9.5%
  • Investment approach: Primarily a portfolio investor but has taken some larger stakes more recently including $6.9 b in Citigroup, Plans to increase investment in UBS in spite of losses on $10 b investment made in Jan-08; invested $1.5b in Sintonia and several property joint ventures in Europe and Asia. It is also rumored to be the lead investor in a new TPG fund. About one-third of the assets are managed by external managers, with two-thirds managed internally
  • Investments in the U.S., EU and Japan still make up 80% of its portfolio, despite increase in exposure to Emerging markets. Equity share fell to 44% of its portfolio from about half two years ago, investments in alternative assets such as private equity and real estate rose to 23% from 20%. Cash made up 7% as of March.
  • The shift to cash early in credit crisis meant it had cash on hand to invest in UBS.
  • Regional: The Americas made up 40% (34% U.S.) of its assets, down from as much as 45% two years ago. Investments in Europe rose to 35% from 25%. Asia now accounts for 23% of its investments, with Japan making up almost half of them
  • GIC: Uncertain global economic growth and financial market prospects and falling global liquidity make high returns challenging. Plans to increase investment in emerging markets via private equity funds to avoid political backlash
  • Based on Singapore's balance of payment and international investment position AUM of around $220b seems plausible
  • GIC along with ADIA recently agreed on code of conduct for SWF with U.S. and was a key player in IMF code of conduct: SWF decisions should be based solely on commercial grounds rather than geopolitical goals; More disclosure of strategies would reduce uncertainty and build trust; Recipient countries should have predictable, proportionate investment frameworks not protectionist barriers, nor should they seek to direct SWF investment.

p/s photo: Cherrie Ying Choi Yee



2 comments:

mil said...

Conceptually they were right in switching out of Chinese Banks into US / European Financials. Am curious as to why they sold so early in the recovery (if any) and maintained its committment to Citi and UBS..

Do they need to cash for some other investments? Casinos in Spore?

rask3 said...

Hi,

Good article. Investment is not child's play and this was borne out long ago when geniuses like Isaac Newton and J.M. Keynes lost tons of moolah in their respective forays.


Investing in banks is particularly
risky as what is important is not the profit a bank reports, rather it is how that profit was derived. The ideal way would be to ask the bank to open up their loan book to see and make a judgement on the quality of those assets.


And never invest in a bank if they derive much of their profit from derivatives and other such shit, unless you have expertise in these kind of mumbo jumbo.


Lastly one should also ask whether bank management is being incentivised to produce profits at all costs. If they don't have much to lose for taking huge risks with shareholders money, why bother with them?


I hope Temasek will consder these points as they have the clout to demand for due diligence.