GIC was right to reduce weightage on developed market equities: Lawrence Wong

SINGAPORE: Singapore sovereign wealth fund GIC is not a short-term player, and takes a more conservative view in situations of market exuberance, said Second Minister for Finance Lawrence Wong in Parliament on Tuesday (Nov 7).

To that end, it has, said Mr Wong, “correctly” reduced its weightage on developed market equities.

Mr Wong was responding to a question by Non-Constituency Member of Parliament Leon Perera, who asked why GIC had reduced its allocation to developed market equities in “such a big way” in the years 2010 to 2012, and continued to do so until 2016, thereby missing the surge in developed market equities in the last five-year period.

“If one takes the view that these developed market equities might not hold good long-term returns, one could still have executed a strategy whereby this asset class was used to generate short-term returns before taking profit and exiting over the past five years,” Mr Perera said.

In response, Mr Wong noted that it is easy to judge GIC’s move on hindsight, and say it could easily have ridden the wave. But this, he stressed, is looking back.

“I think the assessment by most market players is that developed market equities are high in valuation and there is considerable uncertainty in direct market equities today.

“One can take a short-term view and say, let’s play the short-term game,” Mr Wong said. “But GIC is not a short-term player. GIC invests in the long term, and in a situation where there is market exuberance like now, GIC – correctly, we think – takes a view that is more conservative and reduces its weightage on developed market equities accordingly.”

Mr Wong also stressed, in response to questions from Mr Perera, that it is “not meaningful” to compare the returns and expenses of GIC and Temasek Holdings across different entities globally, as they have different mandates, risk profiles and operating constraints.

“All else being equal, a fund of a higher risk profile should generate higher returns over time, but the outcomes will be more volatile,” he said. “As another example, a fund that is purely invested in publicly listed equities and bonds would likely incur lower expenses than a fund that invests in real estate and private equity, as these are markets which are harder to access, but have the potential to yield further return.”

Mr Wong explained that the Government has set a reference portfolio that expresses the risk it is prepared to take. “GIC is allocated that risk budget, and has to perform and achieve maximum returns according to that risk budget they are accorded,” he said.

“So the way we can easily evaluate GIC’s performance is by looking at the amount of risk that it takes, and whether the returns it is getting is commensurate with the risk that it is undertaking in that portfolio.

“That is the benchmark we have put in place for GIC’s investment strategies.”