Singapore’s Temasek will step up investment in private markets, particularly in areas of innovation, after posting a much lower return than last year, in line with the global trend among its peers.

The S$313 billion ($230 billion) fund revealed on Tuesday (July 9) that it would plough more money into science- and technology-related assets, playing to one of its traditional strengths, in an effort to counter the gloomy outlook.

For the year ended March 31, Temasek reported a one-year total shareholder return of 1.49%. This was well below both the 12.19% gain it made the year before and its annualised 9% return over the decade. But it is hardly alone in struggling for yield: last week Japan's huge Government Pension Investment Fund reported a gain of 1.5% for fiscal year 2018.

“Private investments, based on our past performance and based on what we have seen, will give us better returns in the future as we shape our portfolio in the next 10 years,” said Dilhan Pillay, chief executive of Temasek International. 

Dilhan Pillay

The institution is looking to invest more in alternative investments such as venture capital, he said. 

This reflects a clear trend in recent years for sovereign wealth funds to do more direct and co-investments (as opposed to investments via commingled funds) and to allocate more capital to earlier rounds of venture financing.

Listed assets made up 80% of Temasek’s portfolio in 2011 with the rest invested in unlisted assets. The listed-to-unlisted asset ratio has since then dramatically shifted to 58%-42%.

“That’s a trend has been increasing over the last 10 years and we think that will continue,” Pillay said.

The continuing push into private investments has come as fast-growing firms that rely on disruptive technology are choosing to stay unlisted for longer than in the past amid greater availability of private capital.

Tech firms that have listed in recent years, such as Facebook and Tesla, have seen setbacks severely punished by stock markets, standing as stark warnings to other innovators about the risks of going public.

Unlike private equity managers, which are under pressure to list portfolio companies and take profits to pay clients, long-only investors have the investment mandate to wait longer for a business to mature, analysts say.

LOW RETURNS FOR LONGER?

And wait they may have to, as Temasek intimated that the prevailing low-yield environment looks unlikely to ease any time soon. 

A low-interest-rate environment in the wake of weak growth could impact return expectations for the longer term, admitted Png Chin Yee, senior managing director for the institution’s portfolio strategy and risk group.

Png Chin Yee

Especially as central banks around the world are running out of options to stoke growth. “Policymakers have signalled their willingness to undertake accommodative actions, but such policy phase is limited particularly in markets where rates are already low,” Png said. 

Indeed, the low-inflation and low-rate environment is prompting the Temasek to increase its private market exposure more and earlier than it had planned, as it sees value in certain areas, she said. 

The fund also now faces greater competition in private markets, which has to valuations remaining “elevated”, Pillay conceded. “There is a lot more capital now looking for yield.”

IMPACT OF TRADE TENSIONS

What’s more, trade tensions between the US and China, particularly in respect of technology, “are already destroying supply chains”, with technology restrictions leading to “a bifurcation of systems globally”, Png said. “This could have [a] meaningful impact on medium-term growth and productivity.”

Such concerns reflect those of other big international investors, such as fellow Singaporean state investor GIC.

In fact, the US-China trade dispute was already having an impact on Temasek's portfolio last year.

“We went into the beginning of last year with the view that the US was late-cycle, risking recession,” Png said.

Hence Temasek decided to step up its divestments and scale back its investments, she added. It invested S$24 billion and sold S$28 billion of assets for the year ending March 31, after investing S$29 billion and divesting S$16 billion a year earlier. Annual divestments had averaged about S$18 billion in the five years to 2018.

However, after the Federal Reserve was unable to normalise rates amid the trade tensions, Temasek's early investing call morphed into a belief that the US central bank would act to rein in an overheating economy fuelled by fiscal stimulus, Png said.

Of course, Temasek is not the only investor to have been wrongfooted by the hugely unpredictable actions of President Donald Trump, and it presumably won't be the last.

In the meantime, the Singaporean institution could do a lot worse than concentrate on doing what has served it well in the past.

Article has been updated to clarify that Temasek's divestments in the year ending March 31, 2018 were S$16 billion. 

Article has been further updated to clarify that Temasek's ratio of listed-to-unlisted assets was 58%-42% respectively.