long-term value investing in a low-yield environment
TRANSCRIPT
The difference time makes: Long-Term Value Investing in a Low-Yield Environment
22 February 2016
• Mandate is Everything: GIC Secures Singapore’s Financial Future
• Market Outlook: Challenges & Opportunities
• GIC’s Approach: A disciplined long-term, value investor
• Our People
Coming upin my talk…
Securing Singapore’s Financial Future
• GIC was the brainchild of Dr Goh Keng Swee, then Deputy Prime Minister and Chairman of the Monetary Authority of Singapore
• He saw the need for an entity dedicated to the task of investing Singapore’s growing reserves for better long-term returns
• Created what in retrospect, was the prototype Sovereign Wealth Fund
First non-commodity based country to start a SWF
“There is no real secret about the way in which most nations and individuals grow rich. They must save a good part of their income, and have that wisely and profitably invested. The more you save and the more wisely you invest, the faster you get rich”
GIC’s returns
benefit present and
future generations
of Singaporeans
• Investment returns of GIC, MAS and TemasekHoldings, contribute toward the annualgovernment budget
• Amounts to about S$8 to S$9 billion, or about 15%of the total budget
• The Singapore Constitution spells out a spendingrule that states the government can utilise upto 50% of long-term expected real rate ofreturn for areas such as improving physicalinfrastructure, R&D, education and strengtheningsocial safety nets.
• The remaining 50% is saved as Past Reservesfor future generations of Singaporeans.
• Our client requires us to achieve good long-term returns to preserve and enhance the international purchasing power of the reserves
• This translates to our investment objective of: Achieving good long-term returns above global inflation, over an investment horizon of 20 years
Mandate is everything
Low returns going forward
7
• Cautious on the outlook for risk assets – from equities to commodities, from real estate to private equity
• Expect prospective returns – beta – to be on the low side going forward
• Work very hard to find bottom-up – alpha –opportunities to invest in the right assets, as we have the skills and the network to do so
• A period of lower beta returns, but there remain alpha opportunities – and certainly GIC remains open for business
Low beta returns, seize alpha opportunities
A disciplined, long-term value investor
• Only ≈5% of US mutual funds that are topquartile performers this year can be expected tobe top quartile in the next 3 years
• Would you expect a top engineer or doctor orlawyer to fall from grace as easily as a topinvestor?
• Why?
What’s the key difference between a good investor and a good engineer?
• Not easy to beat the market; you’ll have to besmarter than many smart investors out there
• Beating the market is a relative game – notabsolute, unlike building a bridge or operatingon a patient
Beating the market is tough - but not impossible
• What’s the GIC edge?
• How to sharpen our investment framework andprocess?
• What challenges does a low-yield environmentpose?
Questions we ask ourselves
• Focus on long-term fundamentals that will lead to value creation
• Bring stability of capital to businesses; certainty and commitment through short-term volatility
Long-Term Investor
• Offer sizeable investment potential across the capital structure (debt, equity, direct assets) that satisfies growing and diversifying financial needs of businesses
Scale
• Invest across countries and industries, offering unique global perspectives and business insights
• Open up our truly global network of relationships to facilitate new business partnerships and opportunities
Reach
*Entities incorporation date | ** As at 17 July 2015
Forming A Global Footprint
GIC’s 5 investing principles
Pursue intrinsic value and maintain price discipline
Practise long-term investing
Pick our spots: be focused and leverage our strengths
Pay attention to risk control
Prepare for the future, not predict it
Innovative cost of capital framework,
with clear governance
Policy Portfolio:
Key driver of risk and returns over the long term
What’s value investing?
“the discipline of buying securities at a significant discount from their current underlying values and holding them until more of their value is realised”
Value investing, according to Seth Klarman, Baupost Group
Examples of value investments
1. De-risking and re-risking the GIC portfolio in 2007-08 and 2009
Private Equity
Real Estate
Inflation-linked bonds
Nominal bonds & cash
Developed Market equities
Emerging Market Equities
11%-15%
9%-13%
4%-6%
25%-30%
20%-30%
15%-20%
As of 1 April 2014
2. Investing in Lenovo’s inaugural $1.5bn USD bond issuance maturing in 2019
• Need emotional fortitude and a disciplined investment framework/process
• Many inputs into the framework are more art than science
• Structural changes could surprise even experienced investors
• Not all points on the business cycle and valuation cycle are favourable to value investors
Value investing: practical challenges
• An option, not obligation to buy and hold
• Ex-ante, not ex-post
• Function of price, not time
• Capitalises on:
– Short-term market fads and irrationality
– GIC’s capabilities: research, processes, incentives
– Personal mental fortitude
Long-term investing in practice
LT investing is embedded in GIC’s value strategies and Policy Portfolio
Higher risk, higher return 0ver the long term
Our People
• Being long-term in our investing approach, we are less influenced by short-term factors and market noise
• Our talent management practices focus on making GIC one of the best places in the world to build a long-term career, where we continuously grow and develop our people
• We practise long-termism in all aspects of the investing business – from investing to operations
Each of us to be the best we can be
Connect with us on LinkedIn at https://www.linkedin.com/company/gic
for updates on our investment news, corporate initiatives and insight into our company culture, or find out more at www.gic.com.sg.