MAS eyes external expertise in equity, factor investing

Singapore's reserve-rich central bank could be looking to tweak its IG bond-heavy approach to investing to help supplement the city-state's financial status and make diversification gains.
MAS eyes external expertise in equity, factor investing

The Monetary Authority of Singapore (MAS) appears increasingly eager to engage with external asset managers in such areas as factor investing and equities as part of a broader strategy to further diversify its assets.

By encouraging more asset managers with expertise in these areas to operate out of Singapore, it may also form part of broader efforts to enhance the city-state's status as a financial hub.

“We seek to tap on EFM [external fund manager] expertise that is complementary to our internal investment capabilities," a MAS spokeswoman told AsianInvestor last week. “Examples of these include [expertise] in equities and emerging markets, as well as specialised investment approaches such as factor-based investing.” 

“Factor-based investing has broader relevance for us as a lens to understand the return and risk drivers in our overall portfolio, with consequent implications for how we construct our beta exposures and conduct stress testing. As such, it continues to be an area which we study closely,” the spokeswoman said. She did not provide further details.

With about $300 billion in official foreign reserves, Singapore's central bank boasts the 11th highest stock of foreign reserves in the world.

A large chunk of these reserves is invested in investment-grade bonds issued in advanced economies, although there is no detailed breakdown in its  latest annual report.

A small portion is also invested in forex-related instruments, with an even smaller allocation to equity funds, according to a consultant familiar with the MAS's investment processes, who spoke to AsianInvestor on condition of anonymity.

Other experts say much the same.

"MAS has a pretty sophisticated team for foreign exchange trading, derivatives and fixed income,” said Steven Seow, founder of Singapore Consultancy and former Asia head of wealth management at Mercer, told AsianInvestor.

However, equities are not currently an area of strength for the central bank. So any inclination by MAS to consider a bigger allocation to emerging markets and equities would likely be part of a broader plan to diversify its assets, Seow said, envisaging a mixed approach.

“They are likely following a barbell strategy,” he said, referring to the investment strategy that advocates pairing two distinctly different kinds of investments: one end holds extremely safe investments, while the other holds risky or speculative investments.

Another independent investment consultant who has previously advised central banks said a shift towards a bigger allocation to equities, no matter how small, is notable given how MAS's entire portfolio had been made up of fixed income just a few years ago.

Ravi Menon, MAS

Singapore’s two sovereign wealth funds, GIC and Temasek Holdings, have traditionally been stronger in equity investing, both listed and unlisted. While GIC has a portfolio of foreign assets well above $100 billion, Temasek holds equity stakes in domestic and foreign companies valued at more than $200 billion.

Indeed, part of Singapore’s official foreign reserves has already been transferred to GIC, which was then tasked with investing in a globally diversified portfolio of asset classes with a higher risk profile to deliver good long-term returns, Ravi Menon, managing director of MAS, noted in a March 13 speech.

Compared with MAS and GIC, Temasek is further out on the risk-return spectrum, he said.

As things stand, it is unlikely that the MAS is looking at factor investing, equities or emerging markets to simply bump up returns. “Chasing returns is not the mandate of the central bank, nor should it be for any central bank,” Seow noted.


MAS's interest in factor investing is understandable, especially if it involves equities, said the independent consultant. “When some part of the return is attributable to factors, you don’t need to pay active management fees to [gain] exposure to those factors,” he said. “At the very minimum, it helps investors understand what factors they are exposed to and build a portfolio that compliments the non-factor exposure in the portfolio, which is an idiosyncratic risk.”

The challenge, of course, is that factor investing is not always easy to do. “Factors are not necessarily stable; what starts off as a portfolio of value stocks can, in two years, turn into a portfolio of growth stocks," the consultant added.

That is why the city-state may now be looking for external help on that front. In his speech, Menon noted that understanding factors could help the central bank to improve its understanding of risk drivers as well as return sources.

“There are two applications of this approach – return enhancement and portfolio analysis,” Menon said. Using approaches such as factor-based investing can help investors to create more efficient and diversified portfolios compared to a traditional asset class-driven approach, he added.

MAS headquarters

MAS interest in factor, equities and emerging markets investing could also spur asset managers with these capabilities to establish operations in Singapore, given the precedents set over three decades with the external fixed-income mandates it has handed out.

“They tend to favour asset managers [for mandates] that have set up base or operate out of Singapore,” the independent consultant said.

That is one reason, he said, why many of the asset management industry’s biggest names in fixed income, such as BlackRock and Pimco, have set up base in Singapore.

That strategy was in play last November too when MAS announced it would place up to $5 billion with private equity and infrastructure fund managers to boost the local private financing ecosystem and encourage more private fund operators to establish operations in Singapore.

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