The Government of Singapore Investment Corporation (GIC) has adopted a more flexible and streamlined method of portfolio management, after only the second overhaul of its investment approach since the fund's inception in 1981.
The sovereign wealth fund, with an estimated $200 billion-plus in assets, implemented the new approach in April and set out in detail last week for the first time how it will work.
It is based on three pillars: a reference portfolio comprising 65% global equities and 35% global bonds; a policy portfolio comprising six core asset classes; and an active portfolio, which can deviate from the policy portfolio and add value through active, skill-based strategies.
The reference portfolio is consistent with the government’s mandate for GIC, to secure a reasonable rate of return above global inflation over the long term without taking excessive risk. It is comprised 65% of the MSCI All Country World Equity Index and 35% the Barclays Global Aggregate Index.
GIC notes that an investor with a conservative 30% equities, 40% bonds and 30% cash portfolio would have earned 5.8% a year in dollar terms over the past 20 years, compared to 7.2% from a 65:35 global portfolio.
The policy portfolio is the main driver of GIC’s returns over the long term and has been simplified to focus on six core asset classes (developed market equities; emerging market equities; nominal bonds and cash; inflation-linked bonds; private equity; and real estate – see chart below for the planned allocations).
This compares to 13 before, which also included infrastructure, marketable alternatives, natural resources, special situations portfolio, real return programme, and cash.
Under the policy portfolio, GIC uses a “disciplined rebalancing approach” to the long-term asset mix. It involves buying more of the assets that have fallen in value and selling some of the assets that have risen in value, to keep the asset mix steady over time.
The active portfolio seeks to outperform the policy portfolio, with the overall risk budget allocated among active strategies by management. However, unlike the previous approach, where active strategies were confined within individual asset classes, the new approach allows strategies to be funded by a combination of asset classes. Funding of these investments comes from selling assets with similar risk characteristics in the policy portfolio.
GIC consulted a number of investment veterans for the review: Leonard Baker, partner at Sutter Hill Ventures; John Ilkiw, former senior vice president of portfolio design and risk management at Canada Pension Plan Investment Board (CPPIB); Knut Kjaer, former CEO of Norges Bank Investment Management; Mark Kritzman, CIO of Windham Capital Management; Dr Martin Leibowitz, former CIO of Tiaa-Cref; Robert Litterman, former chairman, Goldman Sachs Asset Management Quantitative Investment Strategies Group; Howard Marks, chairman of Oaktree Capital Management; and Brian Singer, former head of UBS Global Investment Solutions.
The portfolio management shift has been accompanied by a raft of senior personnel changes at GIC in the past six months. Lim Chow Kiat became chief investment officer on February 1 to replace the long-serving Ng Kok Song. Lim’s role as head of asset management has been taken on April 1 by Europe president Jeffrey Jaensubhakij, who has moved to Singapore from London. Lim Kee Chong has been promoted to deputy CIO from head of total return equities.
Moreover, four managing directors retired in the year since July 2012 – Wan Ismail, Chen Soon Bin, David Dickinson and Michael Simcock – and four have since been appointed: Sun Jianjun, John Tang, Tham Chiew Kit and Bryan Yeo.
Meanwhile three new members joined the international advisory board this year: Knut Kjaer, formerly of Norges Bank IM; Ng Kok Song, now GIC's chairman of global investments; and David Denison, former president and CEO of CPPIB.