(Disclaimer: All opinions expressed in this article belong solely to the writer)
Last week, an opinion published on a Straits Times forum on July 17, alleging that Temasek’s record growth in portfolio value is actually low by global standards, began circulating in some Singaporean media outlets.
The question, asked by a certain Alfred Chan, is certainly valid. While returns of 24.5 per cent look good, why are they less than half of what global stock markets have achieved in the same time?
MSCI World Index is a useful benchmark of their performance, tracking indexes across 23 major economies, providing a summary into the performance of the developed world. Between 1 April 2020 and 31 March 2021 — the same period Temasek reported — it has grown by 51 per cent.
Is Temasek lagging behind? Is Singapore’s most aggressive fund being mismanaged? Would the money be better spent if it was simply put into some index fund, without overheads, including likely high salaries for its management?
Not quite.
You see, single year returns tend to be very misleading — particularly when they are framed in ways that support a specific point, distracting from broader perspective.
We know that hundreds of billions of dollars in public money aren’t allocated for the short but the long term, which typically spans multiple decades.
But even on a year-on-year basis, nobody was asking questions about MSCI World and other stock indexes last year, when Temasek lost 2.28 per cent for the year ending 31 March 2020. Interestingly, stock markets lost about 14 per cent, but somehow nobody raised it then.
As you can see, they suffer from a much higher volatility than Temasek’s portfolio.
Intergenerational endowment
Since it is dealing with public money, which is meant to support generations of Singaporeans, Temasek cannot accept high volatility and risk associated with stock trading.
This is truer today more than ever as global stock rallies are largely a result of monetary and fiscal policies enacted by governments in different countries, and their future consequences are uncertain.
After all, what goes up typically has to come down at some point.
While it may seem today that the bull market is going to last forever, we have to remember that it’s the belief in endless growth that typically underpins the worst financial crises, when people believe they can’t lose (like what happened during the property boom in America which led to the meltdown of 2008/09).
Understanding this, Temasek typically invests in selected companies and retains its share in them over many years. It also distributes its bets across different regions and close to two-thirds of its portfolio is currently in Asia where stimulus packages that cause stock prices to inflate are nowhere near as generous as in the West.
This diversification provides greater stability and lower risk, while still yielding high returns. How high? It depends on the period you look at.
Slow and steady wins this race
While many people love to pick short-term figures, trying to frame them negatively for the fund, it’s the multi-year performance that really matters.
Over the past 10 years, Temasek has returned an annualised average of seven per cent per year.
This adds up to 96.7 per cent in total, pretty much doubling the size of the investment in a decade. And its gap behind MSCI index — which produced 110 per cent in the same period — is markedly smaller with a lower risk profile too.
At a 20-year mark however, the situation is quite a lot different and by a significant margin. At its eight per cent annual average over two decades, Temasek has returned a whopping 366 per cent with MSCI World appreciating by just 160 per cent.
Which one do you prefer now?
They say hindsight is always 20/20. It’s easy to say that in the past year, putting money in global stocks was the most profitable investment. But if we take this short-sighted view, we could just as well argue that it would have been best to put all the money into cryptocurrencies and make trillions of dollars in the process…
The role of a fund like Temasek Holdings is not to gamble or speculate with public funds, but rather place them in selected companies, including in Singapore itself.
Underappreciated role in the local economy
At this point, we also have to consider the special role Temasek plays in Singapore’s economy. It’s not merely an investment fund charged with profitably multiplying past reserves, but an active stakeholder in the country’s flagship businesses.
Approximately 25 per cent of Temasek’s portfolio is invested in Singapore, in companies like DBS, Singtel, Mediacorp, Port of Singapore, SMRT and Singapore Airlines, among many others.
As a government-owned shareholder, it supports corporations critical to Singapore’s existence.
In one of my recent articles, I mentioned how Temasek helped SIA raise S$20 billion not only to weather the pandemic, which has decimated the aviation industry, but also position the company to reap the most from the ultimate revival, outcompeting other regional carriers for a greater share of the market.
This in turn, is going to strengthen the hub status of Singapore and Changi Airport, creating long-term benefits for the entire Singaporean economy and the country’s geopolitical importance.
Temasek Holdings is also a shareholder in American BlackRock — the largest asset management company in the world — with which it recently launched joint-venture Decarbonization Partners, which is going to invest in late-stage environmental startups.
Starting with US$600 million, they are aiming to boost it to US$5 billion or more in the coming years.
This is not only a likely profitable investment (potentially yielding over 20 per cent per annum), but one that’s giving Temasek (and, by extension, Singapore) a stake in the green economy of the future that is going to replace at least some of the heavy industries currently present in the city-state.
In other words, Temasek acts not only with financial returns in mind, but strategic interests of Singapore as well.
The consequences of these decisions are going to be reflected not only in the anticipated growth of shareholder returns but also through knock-on effects for the local economy as a whole, and it’s not something that should be dismissed lightly.
Ever since its founding in 1974, Temasek has played a critical role building up the nation’s critical industries — telecommunications, logistics, banking, technology or engineering — what is not only of economic, but political importance as well.
Its impact cannot be boiled down to a single, cherry-picked figure and has to be viewed in a proper context, across sufficiently long periods of time.
And in this perspective, it’s clear that it has not only provided remarkable returns — beating the global stock markets in the long run — but has also served a strategic role as one of the drivers of Singapore’s prosperity.
Featured Image Credit: Munshi Ahmed via Bloomberg
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