Temasek takes active investor role in a bid to boost portfolio

Temasek Holdings is already among the most high-profile investors in Asia, so changes to its charter are bound to attract attention. The most recent changes reveal that the investment arm of the Singapore government is moving to become a more active investor in its portfolio companies, at a time when it is raising overseas allocations and is under pressure to recover from a $40 billion loss.

Originally published in 2002, the charter is just a one-page document. But the addition of the words "active value-oriented investor" and "active shareholder" makes a big difference. The changes are meant to "reaffirm" the role of Temasek as a more hands-on investor for the purpose of delivering sustainable returns from its investments. The charter is expected to change regularly to ensure that it remains relevant to Temasek's goals and investment strategies.

"We have refined our charter to more clearly articulate our focus as a value-oriented investor and also as a shareholder focused on achieving sustainable returns by engaging with the boards and management of our portfolio companies," said Temasek chairman S Dhanabalan, during the launch of the new charter in Singapore.

The charter outlines how Temasek plans to work with the companies it invests in to ensure financial discipline and sound governance in building significant international or regional businesses. Temasek says it will exercise its rights as a shareholder to help create sustainable value.

In a background paper on the new charter, Temasek says it places significant weight on the quality, competence, effectiveness and independence of the boards of the companies it invests in. While Temasek plans to engage the boards and management to achieve sustainable returns, it does not plan to involve itself in day-to-day commercial decisions or business operations.

Temasek's mission to achieve sustainable growth remains unchanged in the updated charter, which also spells out Temasek's commitment to contribute a part of its returns to encouraging the growth and development of the "wider community".

The changes in the charter reflect the changes in Temasek's investment portfolio. When it was set up in 1974, Temasek's investment focus was mainly Singapore-listed companies and that remained the case until seven years ago when it started to increase its exposure in companies overseas. At present, two-thirds of its underlying investment portfolio is in companies outside of Singapore.

As of March, Temasek had an investment portfolio worth S$185 billion ($134 billion), focused mainly on Singapore (33%), Asia (40%) and OECD economies (23%); the balance was in other markets. Temasek's investment strategies centre on four themes: transforming economies; thriving middle class; deepening comparative advantages; and emerging champions.

Dhanabalan notes that, over the years, Temasek's relationship with its various stakeholders has evolved. In the initial years of Temasek's operations, its role was mainly that of a commercial steward or custodian. Its board and management were comprised mostly of civil servants. Now, both the board and management comprise of more private sector representatives with more investment expertise and experience.

Meanwhile, one other change in the charter is the removal of the clause "for the long-term benefit of Singapore". Although Temasek's investment activities still ultimately benefit Singapore (or hurt it during difficult times), perhaps stripping the charter of the reference could help appease critics of sovereign wealth funds (SWFs) and quasi-SWFs.

Concerns have been raised about SWFs -- whose number and asset size have been increasing -- owning significant stakes in major corporations in other countries. SWFs have existed since the 1950s, but their asset size and clout in the investment community have grown dramatically over the past 10 to 15 years. Among the more prominent investments made by SWFs recently were those that involved the rescue of US banks that fell victim to the subprime crisis.

Among Temasek's high-profile investments is its purchase of a 14% stake in Merrill Lynch beginning in December 2007. Its stake was converted into shares of Bank of America in January 2009 following Merrill's acquisition by the US bank in September 2008. Temasek eventually divested its entire stake in Bank of America during the first quarter of this year.

In June this year, Temasek found itself having to explain to the Singapore parliament its divestment of its Bank of America stake plus a S$58 billion ($40 billion) portfolio loss incurred in the period from March to November 2008. This loss was substantial as it amounts to around half of the S$114 billion gain that Temasek made between 2003 and 2007.

Singapore's finance minister Tharman Shanmugaratnam said the sale of Temasek's Bank of America stake was the result of a reassessment of its investment in what was originally Merrill Lynch. He attributed the overall portfolio loss to the impact of the financial crisis on global market valuations.

Despite its increasing allocations to investments overseas, Temasek is still a major investor in Singapore. It has the biggest stake in several key Singapore blue-chips including Singapore Telecommunications and DBS Group Holdings. Other investments include CapitaLand and Chartered Semiconductor Manufacturing.