GIC was previously known as the Government of Singapore Investment Corporation. It was formed 40 years ago to manage Singapore’s reserves.
Whenever GIC is mentioned on social media or the web, it often gets politicised by Singaporeans. But the recent publication of the book Bold Vision: The untold story of Singapore’s Reserves and its Sovereign Wealth Fund by Freddy Orchard gives us a glimpse of GIC’s inner workings, and investors can learn many useful lessons from this organisation.
Here is what I have learned from the book :
1) We should have an idea of why we are investing our money
In 2002, the board commissioned a study to review GIC’s investment policy and strategy. The study highlights the critical tensions that retail investors would eventually need to address.
As investors, we face contradictory goals. On the one hand, investments can be seen as rainy day funds. Position your investment this way means ensuring that investments are liquid and can be drawn down when catastrophe strikes. You will develop a preference for less volatile asset classes.
On the other hand, investments can be seen as endowments where short term losses are tolerable. When you position your portfolio this other way, you will invest in securities that can be less liquid, more volatile, and result in higher longer-term returns.
After the study in 2002, GIC was determined that reserves are both rainy day funds and endowments, and in 2009, Singapore began to allow government spending from realised and unrealised capital gains.
2) We should construct a Reference Portfolio to understand our risk tolerance
In conventional finance, we attempt to understand our risk tolerance by looking at returns and standard deviation of asset classes. In 2013, GIC established a New Investment Framework (NIF) to address various components of its investment process. One brilliant insight is that risk tolerance can be best expressed as an asset allocation decision between equities and bonds.
The book revealed that GIC’s reference portfolio is 65% allocated to equities and 35% allocated to bonds which means that GIC would need to tolerate 20%-30% drawdowns over a three year rolling period in tumultuous times.
GIC probably does not invest directly in a reference portfolio, but investors can benefit from its elegance and simplicity.
A retail investor can build a core portfolio with two ETFs by referring to my article.
3) We should construct a Policy Portfolio to determine which asset classes to invest in
After clarifying our risk tolerance, we need to decide where to play the investment game.
GIC’s portfolio determines its allocation policy which determines GIC’s long term returns and risk exposure. Every asset class has a risk premium. For example, in the ERM class of Batch 23, we determined that earnings yield over the 20-year bond return was 3.81% for Singapore equities but was 2.52% for Malaysian equities. Consequently, we would be better off investing in Singapore compared to Malaysia at the moment.
GIC has more investment choices compared to a retail investor. Their asset class categories include developed market equities, emerging market equities, nominal bonds, cash, inflation-linked bonds, private equity and real estate. But a retail investor is not limited to the same list and can even include cryptocurrency in his mix.
A factor model as taught in ERM can be a valuable framework for looking for “beta” or returns by searching for the highest risk premiums over the long term. For example, our latest models have flagged a return of value investing into Singapore blue-chips with lower PE ratios, PB ratios and higher dividends, signalling possible outperformance of blue-chips over the STI in 2022.
4) We should have an Active Portfolio to find outsized returns
GIC has an Active Portfolio to generate alpha or oversized returns compared to what is expected by the returns of the general asset class. These are discretionary strategies from highly skilled managers that need to have potential returns above a hurdle rate that somehow need to be executed without raising the portfolio’s overall risk profile.
Retail investors can learn from GIC to reserve some capital and time to make tactical bets.
When Keppel Corp offered SPH investors their shares for cash, SPH REIT and Keppel REIT stocks, I figured out that the combined assets would be worth about $2.10 while the SPH counter currently trades at $1.93. So, I took an x2 leveraged position on the stock.
Three months later, Cuscaden made an all-cash counter-offer at $2.10, and I sold at $2.12. The absolute gain was officially about 9.8%, but our returns would have been closer to 45% if we annualise it. Since it was leveraged bet, the annualised returns would have been closer to 90%.
It’s hard to execute these strategies properly as I soon regretted my sell decision a week later when Keppel made a much better offer. The current bid stands at $2.40 from Cuscaden.
GIC can be a great role model for retail investors
These days, you may occasionally come across an article from opposition supporters who talk about individual investments that may not have done so well. If you swat away the political criticisms, GIC can be a great role model for Singapore investors.
We should acknowledge that GIC’s design performs less well than equity markets during a bull run, but it would lose less in a nasty downturn. We also cannot deny that our frugality and careful management of our reserves have enabled us to spend about $53.7 billion during the pandemic without resulting in borrowing from other countries.
Finally, we will individually face moments of crisis in our lives, so it would be wise and prudent to start investing and planning for the future just like our leaders in the past. It may be time to establish our own “personal GIC” to prepare for our next personal pandemic-like event.
I manage my own investment portfolio, if you’re curious how I do it, join me here.
