Investors are being "complacent" and ignoring market risks in an "environment of heightened uncertainty," according to Singapore's main sovereign wealth fund.
GIC Private, one of the world's biggest investors, believes easy central-bank money has served to drive up asset prices to unrealistic levels, encourage investors to take on risk and depress volatility unreasonably.
"Current valuations suggest overly sanguine expectations about future earnings, even as policy uncertainty remains high," CEO Lim Chow Kiat said as the fund today unveiled its report for the 2016-17 year, which ended in March.
GIC is positioning itself more defensively. It fears it faces underperformance relative to market indices, possibly for several years.
"The combination of stretched valuations, high policy uncertainty and unresolved economic imbalances explains our relatively cautious portfolio stance," Lim, who stepped up from chief investment officer to take GIC's helm at the start of this year, said.
GIC manages $350 billion in assets, according to the Sovereign Wealth Fund Institute, including Singapore's foreign-currency reserves. That ranks it as the eighth-largest SWF in the world.
GIC said on Monday that it generated a nominal return of 5.1% per year over the last five years. The fund likes to look at longer-term returns, however, and has produced an average nominal return of 5.7% per year over the course of the last 20 years.
That, it worries, may be hard to reproduce. "We are prepared for a period of protracted uncertainty and low returns," Lim said in releasing the results. "At today's market valuations, the universe of high-return opportunities has shrunk significantly."
Lim noted that risk-free yields based off 10-year U.S. Treasuries stand at only 0.4% per year, "markedly lower" than the historical average of 1.8%. Riskier assets such as equities have also suffered similar reductions in yields, "portending poorer returns in the future."
Singapore set up the GIC in 1981. It was known by its original name, the Government of Singapore Investment Corp., until mid-2013. That's when it implemented the last major overhaul of its investment strategy and changed the name to reflect the abbreviation that most in the markets already used.
That's the official version. GIC does not like to be called a sovereign wealth fund -- I've had spokespeople call me to complain when I used the term -- and likely prefers to leave the word "Singapore" out of its investment process, particularly when buying into overseas companies in sensitive industries. It is now "private" by name, at least, with no obvious state link.
The fund believes that market pricing does not factor in heightened geopolitical and economic risk. Investors have been encouraged by potential pro-business policies from the Trump administration but have ignored surprises such as Brexit, "unabated" terrorism and the fact that the post-war globalization of capital and trade flows "can no longer be taken for granted."
Although GIC's five-year performance doesn't match 5.7% 20-year long-term results, the 5.1% five-year annual gain does outstrip the 4.3% nominal annual rate of return over each of the last 10 years. That set of results suffers the most from the fallout of the Global Financial Crisis.
Although it generally manages its money conservatively, GIC has taken on more risk since the late 1990s, when as much as 30% of its holdings were in cash.
Its current asset allocation, however, shows 40% of its holdings are in bonds and cash. It has 27% of its money in developed-world equities and 17% in emerging-market stocks. The remainder is in private equity (9% of assets) and real estate (7%).
Its real rate return has been 3.7% per year over the course of the last 20 years. In other words, its performance exceeded global inflation by an annual 3.7% between April 1997 and March 2017. Nominal rates of return are higher because they don't factor in issues such as tax.
Since 2001, 20-year real annual returns have drifted south from an annualized real rate of return of just under 6%. The fund said the current 20-year average is suffering because the high returns of the tech bubble at the turn of the century are dropping off but the fallout of the Global Financial Crisis remains reflected in the performance.
These are tough times for Singapore. Its property market has suffered terribly, with prices sliding for more than three years, imbuing the city with a pervasive despair. Investors should watch for a decline in the stock of unsold properties before climbing back in, as I've outlined before.
Now residential real estate of another sort has caused embarrassment for the Lion City.
Two of the children of founding father Lee Kuan Yew have fought an increasingly public battle over the fate of Lee's modest home with their brother, Lee Hsien Loong, who just happens to be Singapore's prime minister. Their unsentimental father wanted the home destroyed rather than seeing it become somewhere visitors would "trudge through" and turn into "a shambles."
His younger son, Lee Hsien Yang, a former CEO of SingTel, has left Singapore indefinitely because he fears government retribution, as The New York Times explains in outlining the sibling spat.
The younger Lee and his sister, Lee Wei Ling, a prominent neurologist, accuse the prime minister of "a vast and coordinated effort" against them. They say their older brother wants to retain the home and sustain the Lee legacy so he can turn power over to his son.
Much of the family feud is being fought out on Facebook. The soap opera has gripped Singaporean citizens used to an all-powerful government that has spurred their city to great post-war success -- while, as a one-party state, immediately quashing all dissent.
GIC's concern is over stock screens rather than social-media message boards. But it, too, has trepidation about another nasty surprise.
