Singapore has currently 2 sovereign wealth funds, aptly named Temasek Holdings and the Government of Singapore Investment Corporation (or GIC). You probably have been wondering why we have 2 funds while most countries only has 1 fund. This anomaly can largely be explained through the different investment risks each organisation takes in delivering returns for the Republic of Singapore. I say the Republic of Singapore largely because the sovereign wealth funds are designed for the sustaining of the state’s enterprises rather than for the direct wealth creation of the population.
Temasek Holdings was initially founded in 1974 was designed to be a holding company for public entities that had become privatised. These included notable companies today such as Keppel Corporation which had assumed control of the old British port assets and the Development Bank of Singapore (or DBS) that was spun out of the Singapore Economic Development Board (a statutory agency). However over the years the role of the organisation has changed and has expanded beyond its initially scope of shepherding privatised public services and into the new fields of financial trading, venture capital and private equity. The organisation’s objective has been the direct growing of the companies in their stable as well as the overall size of portfolio given to their care. As such their risk appetite has been larger than GIC.
According to their website, Temasek has been able to return a 16% compounded annually, however there are risks to such a strategy of pushing assured to expand one’s portfolio. In 2009, Temasek’s loss was nearly $40 billion due to the Great Recession in the wake of the failure of mortgage backed securities. However, the entire value of it’s portfolio increased by 42% in 2010. Although Warren Buffet, has always said that the first rule is to never lose money, the benefit of being a long-term investor is that you can outlive temporary turmoil in financial markets. For large holding companies or private equity firms, such as Berkshire Hathaway, 3G Capital and Temasek Holdings, the business operations of their individual companies are often not as affected as are the share price of these firms during financial downturns.
Although Temasek announces it’s profits or losses on yearly basis, the real issue at hand is the long-term viability of the companies in their current stable rather than the immediate financial value of these companies in the event of a sale. This creates 2 situations, (1) people who dislike the incumbent will tend to focus on the immediate ups and downs of the financial value of the companies that Temasek owns and (2) people somehow assuming that the government actively tops up Temasek when they make losses which leads to increased extraction of tax from the Singapore populace. Temasek doesn’t receive government monies directly
GIC was founded in 1981 and is regarded as a brainchild of Dr Goh Keng Swee who felt that the Government’s reserves should be managed outside of regular government activities and by a professional investment team. GIC is also, as it turns out the more secretive of the dynamic duo and the primary reason (often given) for this secrecy is that since the firm directly manages the money the government uses in it’s budget as well as to manage our currency giving the exact amount or what they are doing with it would open up the government to speculative attacks (which if you consider the Asian Financial Crisis of the mid 90s is pretty plausible). So what do we really know about the fund. Well we do know that it is more conservatively managed than Temasek Holdings with a hurdle rate (or an expected ROI) of about 5%. Recently with the appointment of Lim Siong Guan as the head at GIC, there has been a significant amount of changes as to how the fund has been run though little of these changes have actually escaped GIC except through hearsay (which I won’t repeat even if it’s good news).
GIC and Temasek’s Impact on the Budget
The Net Investment Returns (NIR) framework allows the Government to tap the investment returns of our reserves for budgetary spending in a sustainable way. Under the framework, the Government can spend up to 50% of the long-term expected real return from the net assets managed by GIC and MAS, and up to 50% of the net investment income from Temasek and other assets. – Parliamentary Reply by DPM Tharman April 2014
And the government has been tapping into the stores recently to fund lots of expenditures and has gone up to use the maximum allowed recently.
So Why 2 funds instead of 1?
“Never keep all your eggs in one basket” comes to mind but really it’s because the funds are invested and expected to do different things for the overall fiscal position of the country.