Why GIC won't provide full portfolio disclosure

GIC's chair of global investments talks about why the Singaporean state fund is less transparent than many peers, its use of asset managers and the failings of some sovereign investors.
Why GIC won't provide full portfolio disclosure

Sovereign wealth funds (SWFs) hold a major advantage over central banks in that they don't have to worry so much about asset liquidity – and yet some do not exploit this benefit, says Ng Kok-Song, chair of global investments at Singapore's biggest state investor.

Being able to invest in illiquid assets and for the very long term – and hence being able to act at appropriate times in contrarian fashion – can help improve returns significantly, he notes.

Ng was chief investment officer at the Government of Singapore Investment Corporation before retiring to take up his current role in February, having been with GIC since 1986, before which he managed the Monetary Authority of Singapore's reserves.

At the Investment Management Association of Singapore's annual forum yesterday, he gave some rare insights into the workings of the state fund, which runs an estimated $220 billion in assets.

Staff retention, for example, is less of an issue for GIC than for some SWFs, says Ng. “I've seen quite a number of sovereign wealth funds that see constant staff turnover. They're not able to retain people, and that makes it very difficult to build long-term relationships with investment partners.”

This has proved another reason for the success of the Singapore fund over the years, he adds: its ability to attract and retain high-quality personnel in areas from research to portfolio management and trading to technology.

But doing so is a “constant work in progress”, says Ng, and one that requires making staff feel properly part of the organisation and creating sufficient incentives for them to stay; which means paying market rates.

In addition to a stable workforce, another factor that helps GIC is its “freedom from political meddling”, says Ng. “It's already difficult enough for an investment organisation to manage market risk without also having to contend with social and political objectives.”

While the Singaporean government has influence over the fund's overall strategy and objectives, he notes, it does not influence individual investments.

One area where GIC lags other SWFs is in its level of transparency, admits Ng. It has made advances on this front, such as publishing an annual report since 2008. However, it still lies 23rd out of 34 in the latest ranking by the Peterson Institute, which scores SWFs on factors including governance, structure, transparency and accountability.

That is nevertheless a rise from the first such ranking in 2007, when it came 32nd. Norges Bank Investment Management, which runs Norway's state pension fund, came top in the latest list.

“We're not aspiring to be first, second or third [in the Peterson ranking], as in my opinion being there carries more disadvantages than advantages,” says Ng. “Every country has its own secrets – and we have ours.

“It's not in the interests of Singapore to be ostentatious, nor to manage our economy [in such a way that we] put ourselves in a vulnerable position,” he adds.

GIC publishes information such as asset class allocation and geographical distribution of assets, but not individual company holdings.

“We constantly ask ourselves what we can share with people so that they have trust and confidence in how we manage the reserves,” says Ng. “But we also ask what we should not share because it will handicap us, put us at a disadvantage.

“So we have to make a distinction between transparency and accountability,” notes Ng. “We have to be accountable to the government and to the people. And as far as that accountability is concerned, we have to have broad agreement on what the metric of measurement should be.”

Ng argues that the important thing to focus on is not returns on individual investments but on overall performance of the portfolio. And the time horizon for meaningful measurement should not be one-, three- or five-years, he adds, but 20 years is an “appropriate” period.

With regard to GIC's use of external fund houses, he says it looks for managers with specialist expertise such as in private equity and infrastructure. Some 80% of the fund's portfolio – including public equity and fixed income assets – is managed internally.

“We use the principle of 'best sourcing',” says Ng. “If someone else can give better results net of fees, we're better off employing them.”

Asked how GIC responded to the 2008/9 financial crisis, given its long-term approach to investing, Ng admitted the investment team was faced with a dilemma.

As early as May 2007, he says he and his colleagues were becoming concerned about what they perceived to be an over-valuation of risk assets globally. “We discussed this at great length in regard to what that meant to a long-term fund like ours, which should not be in the business of what you might call market timing.”

The team recommended to the board that GIC should cut its portfolio risk “meaningfully” by reducing equity beta. Approval was duly granted, and stock holdings were sold off.

Yet equity prices steadily rose from May to October 2007, notes Ng, recalling that that period was “probably one of the most stressful occasions in my career”. Ultimately, of course, the call proved sound, as Bear Stearns collapsed in March 2008, with Lehman Brothers' bankruptcy in September of that year precipitating an outright crash.

GIC then decided soon after to start rebuilding its risk by gradually repurchasing the equities it had sold. And yet stock prices steadily fell until March 2009, says Ng, but ultimately the US stepped in to ensure global institutions were adequately capitalised.

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