Singapore’s GIC bets on alternatives, Asia growth story to tide over macro concerns

Thailand's capital city Bangkok at dusk. Photo: Marla/Pixabay

Amid brewing trade tensions, high asset valuations and slowing global growth, Singapore’s sovereign wealth fund GIC is hoping to tide over the challenging investment climate by sharpening its focus on alternative assets such as private equity and real estate, along with a strategy to remain a loyal subscriber to the Asian growth story.

Maintaining a cautious portfolio stance in its annual report for the year ended March 30, 2019, the wealth fund was seen having reduced its exposure to equities in developed markets from 23 per cent last year to 19 per cent this year, along with a marginal step-up in private equity from 11 per cent last year to 12 per cent in 2019.

The rationale: It invests in illiquid asset classes such as private equity and real estate as they offer the prospect of better returns and exposure to these risk premia enables GIC to harness the power of compounding over time, the fund said in its annual report released on Tuesday.

The wealth fund, counted among the largest and most active global institutional investors in both private and public markets, has reported a 20-year annualised rate of return of 3.4 per cent above global inflation for the year.

The fund believes that high valuations, slowing global growth and significant uncertainties “portend lower returns” for both GIC and the reference portfolio.

Among GIC’s recent private deals includes the development of six hyperscale data centres in Europe for more than $1 billion through its 80:20 joint venture with global data centre firm Equinix. It also entered a deal to buy US freight railroad owner Genesee & Wyoming Inc for about $6.4 billion in partnership with Canadian Brookfield Asset Management Inc.

GIC also partnered Abu Dhabi Investment Authority to invest a combined $495 million in Greenko Energy Holdings, an Indian clean energy producer. Earlier this year, the fund was in news for the acquisition of AkzoNobel’s chemicals business alongside private equity major Carlyle.

Global uncertainty looms

“Political and policy uncertainties remain high, as ongoing trade tensions between the US and China, continuing fragmentation in Europe and the long-drawn Brexit process continue to weigh on business sentiment. This has discouraged businesses from undertaking longer-term capital expenditures, which has in turn contributed to weak global growth,” said the fund’s CEO Lim Chow Kiat.

He further added that should the policy uncertainty lead to a deeper economic slowdown, major markets such as Europe and Japan would have little policy ammunition to respond and are, therefore, likely to experience a more protracted downturn.

“Emerging markets on the whole have more policy room to cushion against a global slowdown, though economies with larger imbalances and vulnerabilities could be exceptions. In short, policymakers’ scope to counter an inevitable downturn is limited. With high asset valuations and low interest rates, the case for investor caution remains strong,” Lim noted.

The fund maintained that it will continue to actively seek out attractive opportunities where the risk-reward is favourable, exploiting its long-term perspective, cross-asset capabilities, and global networks. Guided by its key investment principle – ‘prepare, not predict’ – it will help to deliver sustainable returns over the long term, it added.

The Asia opportunity

“Asia presents attractive opportunities across consumption-based goods and services sectors, including financial services, healthcare, education, and technology. Its global value proposition will increase further, fuelled by the continued rise of its middle class, infrastructure investments, and regional integration, backed by steady technological progress,” the fund added.

The fund’s portfolio is heavily skewed towards Asia with a 32 per cent exposure including Japan, which is more than most global institutional investors. Even in the private markets, GIC ranks as a significant foreign institutional investor in the Asian region.

While the fund gained exposure to Asia indirectly through multi-nationals in the earlier years, with the rising number of strong, unique businesses established by domestic Asian firms, increasingly the firm has started gaining direct exposures.

Having offices in Asia’s key financial cities of Beijing, Mumbai, Seoul, Shanghai and Tokyo, the fund looks at adding value to the investee companies.

However, the fund also believes that Asia has challenges to overcome but these can be addressed, in particular through sustained structural reforms. “As an early and steady investor in the region, we have learned valuable lessons and will continue to strengthen our capabilities and partnerships. This will help us play a positive role in Asia’s growth over the long term,” it added.