Singapores GIC warned against complacency amid calm financial markets, highlighting concerns over high policy uncertainty and stretched valuations.
In its annual investment report published Monday, the sovereign wealth fund defended its relatively cautious portfolio, which reported a 20-year inflation-adjusted return of 3.7 percent for the period ending March 31 a drop from the 4 percent return reported last year.
As a long-term value investor, we remain cautious and recognize that to generate good real returns over time, we have to be prepared for periods of underperformance relative to the market indices, some even for a stretch of several years, said CEO Lim Chow Kiat in a statement.
Institutional Investors Sovereign Wealth Center estimates that GIC has more than $350 billion in assets. The fund currently allocates more than a third of its portfolio to nominal bonds and cash, with 44 percent invested in developed and emerging market equities and 5 percent in inflation-linked bonds. The remainder of the portfolio is in private equity and real estate.
So far this year GIC has written larger checks for fewer direct investments compared with previous years, according to Sovereign Wealth Center data. In the first half of 2017, GIC made 23 direct investments averaging $391 million a deal, compared with 31 deals worth $244 million on average the first half of last year and 43 deals worth $238 million in the first six months of 2015.
This more cautious stance comes amid what GIC defined as a highly uncertain environment, citing developments such as Brexit, the U.S. presidential election, and heightened geopolitical tensions.
We are prepared for a period of protracted uncertainty and low returns, Lim said. A key part of GICs investment strategy in such an environment is to ensure that the GIC portfolio remains robust across a range of plausible scenarios.
GIC added that the current low-volatility environment should not be confused with a low-risk environment.
Managing investment risk goes beyond relying on standard measures of volatility, the report stated. It requires an emphasis on assessing uncertainty, particularly in the current environment. Strategies of scenario analysis, diversification and guarding against complacency due to the phenomenon of low volatility are important.