Published March 24, 2009

Portfolio shocks are bound up with severe market cycles: Tharman

By CHUANG PECK MING

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(SINGAPORE) During severe market cycles, Singapore must expect to see significant fluctuations in the portfolio value of its investments.

This has happened in the current crisis and had happened in 2001, when the equity markets collapsed, Finance Minister Tharman Shanmugaratnam said in Parliament yesterday.

Replying to questions by Non-Constituency MP Sylvia Lim, Mr Tharman said he fully understands why people are concerned about losses in the value of the portfolio of the Government of Singapore Investment Corporation (GIC) in the current crisis.

However, the recent 25 per cent decline in GIC's portfolio value has to be viewed against the much larger investment returns that GIC has gained over the last 10 years - besides the more significant gains it has made over a longer period.

GIC's returns over the long term have been creditable by international standards. Despite seeing two major declines in portfolio value, in 2001 and in the current crisis, GIC's portfolio has still grown significantly in value over the last 10 years, he said.

GIC takes very seriously every decline in the value of its portfolio, including declines in its individual investments, in its tactical reviews, he said.

But it will have to keep to its fundamental strategy of diversifying across asset classes, accepting the risks of investing in riskier assets and investing for long-term gain.

That is how it can make the most of its strategic advantage as a long-term endowment fund, and continue to deliver good returns over the longer horizon, the House heard.

Elaborating, Mr Tharman said the 25 per cent fall in GIC's overall portfolio value - approximately the fall in US dollar terms from the global market peak in October 2007 to end-2008 - reflected major declines in global markets.

Almost all institutional investors have seen large falls in their portfolio values, said the minister. Norway's Norges Bank Investment Management (NBIM), Norway's equivalent of GIC, has lost around 27 per cent in US dollar terms from October 2007 to December 2008.

Mr Tharman also responded to a point raised by Ms Lim about GIC's performance over the different asset classes during the period. He said GIC has on the whole performed on par with market portfolios based on a similar mix of asset classes since the peak in October 2007.

Touching on how GIC's portfolio has been affected by its equity investments, including its high profile investments, Mr Tharman said GIC's overall equity portfolio has moved broadly in line with the relevant global equity market indices during the period. Indeed, GIC has sustained a slightly smaller decline than the market indices.

Fundamentally, he said, it is not appropriate to assess the performance of endowment funds like the GIC or Norway's NBIM over the short-term, or on the basis of individual asset classes or investments.

'We have to take the portfolio as a whole, and assess its performance over the long term - in other words, not over a year or two, nor from the peak to the trough of a single cycle, but across the market cycles.

'That is the mandate which the government has given GIC - to secure good long-term returns on the overall portfolio,' Mr Tharman said.

In accordance with that mandate, GIC's strategy is to allocate funds across a broad range of asset classes, including higher risk assets, with the aim of achieving good long-term returns.

It invests in a diversified portfolio that takes into account the risk and return characteristics of each asset class, so as to achieve better returns for the combined portfolio over the long term.

This strategy accepts that individual asset classes and investments may not always do well, but that taken together, and over a longer period, they must contribute to the good overall performance of the portfolio, he said.

GIC, said Mr Tharman, consciously accepts the risk that individual investments and asset classes may underperform, especially over the short term, because only by accepting those risks and diversifying its portfolio can GIC achieve better longer-term returns.