The scrooges in the government must be smiling over GIC’s 2015 Annual Report even if most of the improvements did not seem to derive from improved investment performance. The higher returns mean more monies for fancy jet-fighters, ministers’ bonuses, vanity projects and at the bottom in the order of priorities the odd crumbs for the huddled masses. And it also means more surpluses taken from CPF.
The writer will just focus on the returns of which GIC reports in US$ terms so currency movements are adjusted in S$ terms. For those who are concerned of China losses, GIC’s North East Asia (China, Japan and Korea) exposure comprised 15% of assets. GIC is known to have invested in both Chinese stocks and bonds. The recent collapse in Chinese equities is accompanied by a surge in bond prices (normal in most stock market collapses). The extent these offset each other and how they impact returns will not be known until next year.
Real Returns Improved because of Inflation
These are the 20 year rolling US$ real (i.e. inflation adjusted) returns and the nominal (actual) returns in 2015 in comparison to 2014.
US$ Real Returns (a) US$ Nominal Returns (b) Inflation (b – a)
2015 4.9% 6.1% + 1.2%
2014 4.1% 6.5% + 2.4%
The most interesting thing is the significant improvement in the real rate of return from 4.1% to 4.9% but the nominal returns fell from 6.5% to 6.1%. How so? That is because the inflation rate has halved from 2.4% to 1.2%. Therefore the improvement in US$ returns did not come from an improvement in investment performance but from a fall in the inflation rate. The fall in nominal US$ returns is due to the strength of the US$ in the past 2 years.
Huge Swings in 5 year series
There are huge fluctuations in the 5 year US$ return series.
2013 2014 2015
5 year US$ returns 2.6% 12.4% 6.3%
The large jump from 2.6% to 12.4% in 2014 is due to the 20%+ loss in 2009 falling out of the 5 year series but still retaining the 20%+ recovery in 2010. With the latter falling out in this year, the return is now normalised.
S$ Returns continued to rise
Given below are 20 year rolling S$ returns adjusted by the annualised movement in US$-S$ exchange rate.
US$ Nominal Returns (a) S$ Nominal Returns (b) Annualised FX Adj.(a – b)
2015 6.1% 5.8% – 0.3%
2014 6.5% 5.5% – 1.0%
Clearly, the improvement from 2014 was entirely due to the fall in the annualised appreciation of S$ over the US$. In the meantime, the S$ continued to strengthen against other currencies such as A$, Euro and JPY which explains the improvement in currency translation by +0.7% was not fully reflected in the improvement in the S$ returns (+0.3%).
GIC is relatively conservative.
A star fund manager historically gets 25% or more of his investment calls wrong. Extrapolating the few known GIC losses across an entire portfolio to allege huge losses and extreme risks is terribly unsound analysis. A diversified portfolio has huge correlations within its asset mix in which, like the current Chinese turmoil and the 2009 market dislocations have shown, events that caused some investments to fall, also causes other to rise to various degrees. Due to such infinite outcomes and permutations from hundreds of individual investments, the portfolio’s risks and returns need to be assessed in entirety.
The simplest method to gauge the riskiness of a portfolio is to analyse its historical volatility – the extent of the ups and downs of its returns. High risk investments have potential for high returns but also high losses; hence their prices fluctuate more than low risk investments. A portfolio with higher historical volatility therefore has more higher risk investments.
Helpfully, GIC provides its annualised historical volatility. Although Norway’s GPF as a comparison does not, its historical volatility can be calculated from its annualised returns. The caveat is that there is a slight duration gap in the analysis as GPF’s annualised returns went back only 18 years.
Nominal Returns 10 year Volatility Excess Returns over GPF
GIC 5.8% 9.0% 0 %
GPF 6.1% 10.2%
GIC’s lower historical volatility infers it is a more conservative asset manager than GPF but both are relatively conservative. A high risk equities only portfolio will be closer to 20% volatility. Since higher risk potentially results in higher returns over the long run, this is evidenced by GPF’s superior return of 6.1% over GIC’s 5.8%. However, the important question is whether GPF’s higher returns compensates for its higher risks in comparison to GIC. The excess returns, calculated to equalize risks, shows there is no difference between GPF and GIC which means GPF’s superior return is entirely due to higher risk tolerance. In fact GIC and GPF are like twins.
How Much Excess Returns taken last 4 years
GIC reported a 5 year USD rolling nominal rate of return of 6.5% but given the depreciation of S$ to US$, the S$ returns is 7.9%. Using this rate of return, the amount of excess returns the government received from investing CPF’s monies since 2011 is given below (CPF’s 2015 Annual Report not yet published).
CPF Balance CPF Interests Investment Earnings Excess Earnings
2014 255 b 10.2 b 20.1 b +10.1 b
2013 233 b 9.3 b 18.4 b + 9.1 b
2012 209 b 8.5 b 16.5 b + 8.0 b
2011 188 b 7.6 b 14.8 b + 7.2 b
The amount of excess returns (i.e. the difference between GIC’s nominal S$ rate of return and interests paid to CPF) is $34.4b for the 4 years from 2011. The excess returns went into the government’s (unreported) surplus but would have meant larger balances for members and larger CPF annuities pay-out.
Hope you find this useful.
* Chris was regional head of capital markets for Asia Pacific until his retirement. He writes opinions and commentaries mostly on economic and financial matters.