This article is republished from the chapter “Letter from the CEO” in the GIC Report FY2023/24. You may read the full report here.
Dear Stakeholders,
2023 proved to be a year of surprises, yet again. Broad consensus views on the economy, including predictions of a global recession, failed to materialise. Unexpected geopolitical events, notably the outbreak of conflict in the Middle East, caught many off guard. In addition, an effusive response to artificial intelligence (AI) fuelled a highly concentrated stock market rally in the US. New climate records for the hottest year1 and fastest sea level rise2 were set, while extreme weather events continued to wreak havoc across all continents.
Navigating Profound Uncertainty
Uncertainty is a given for any investor, but events in the past few years intensified it to a profound level, challenging foundational assumptions of the past four decades. The world order is being reshaped, domestic politics in several large countries are in a state of flux, rapid technological changes are buffeting societies, and the effects of climate change are becoming both more intense and unpredictable. It is no longer sufficient for investors to only consider where we are in the macroeconomic cycle or the future path of interest rates. National security concerns, politically driven regulations, climate impacts and policy, and more must be part of the calculus. This unprecedented uncertainty translates into a wider range of possible outcomes. Pitfalls and windfalls await in equal measure.
No maps exist to help investors navigate this uncertain terrain. Old theories and typical models do not capture sufficient history. Mean reversion3 is less certain, and precedents are few. To navigate this, investors must instead rely on two things: their anchor – the core purpose and principles that define their organisation, and their compass – their unique strengths. For GIC, our purpose – to preserve and enhance Singapore’s foreign reserves for the long term – means doubling down on our principles of maintaining price discipline and a granular approach to diversification. As a long-term investor, our strengths are our long-term, flexible capital and a deep commitment to partnerships. You will see these elements reflected in this year’s GIC Report.
Investment Performance
For the 20-year period from 1 April 2004 to 31 March 2024, the annualised US$ nominal return of our portfolio was 5.8%. Adjusting for global inflation, the annualised 20-year real return was 3.9%. It is lower than last year’s 4.6%. We elaborate on the reasons in the Investment Report, namely that FY2003/04, which saw an exceptional recovery in the equity markets following the dot-com crash, moved out of the rolling 20-year real return window. That exceptional year contrasted starkly with the lower returns of recent years due to weak returns in fixed income and global equities, particularly in emerging markets.
Knowing Who We Are Guides How We Act
The profound uncertainty we face is likely to continue to weigh on returns. Amidst such volatility, how can we achieve our investment objective of preserving and enhancing the foreign reserves placed under our management?
Maintaining Price Discipline
Price discipline is a core part of our investment approach. As a long-term investor, maintaining price discipline delivers steady compounding of the total portfolio returns. Despite fluctuating macroeconomic and geopolitical conditions, certain markets have not yet priced in the level of uncertainty investors face. Instead, many are primed for a Goldilocks – ‘not too hot, not too cold’ – economy. It is a plausible scenario, but only one of many. Risk premia, a measure of additional expected return above the risk-free rate, remain compressed in multiple markets including credit and equities. This signals a potential mismatch between investor confidence and the range of plausible outcomes. In such an environment, GIC must practise price discipline. We must carefully weigh the risk-reward prospects of all potential investments to ensure adequate compensation for assuming the risks.
AI provides a concrete example. Many early-stage AI businesses are commanding very high valuations justified only if they are eventual winners. However, it is difficult to predict who the winners and losers will be. Hardware makers, including semiconductor firms and the infrastructure layer businesses such as cloud platforms, have less downside, though their valuations have also expanded recently. Each case requires careful assessment of its potential risk-return trade-offs.
Granular Diversification
Effective diversification provides the best protection during times of uncertainty. At GIC, we do not just diversify across different asset classes, which most investors do. We are able to diversify with far more granularity, particularly in private markets, because of the capabilities we have built up over many years. Take real estate as an example. We have picked our spots across different sub-sectors — including data centres, student housing, and logistics — and different geographies. These exposures have helped the total portfolio weather the recent sharp rise in interest rates as well as the sharp shift in US commercial real estate.
Playing to Our Strengths
With uncertainty comes risk, but also opportunity. Our strengths, including the ability to provide long-term, flexible capital and our long-standing commitment to partnerships, enable us to capture opportunities that other investors may overlook. Here are a few I would like to highlight, with more details in our feature article, ‘Sharpening Our Edge Amidst Challenging Times’.
Long-term, Flexible Capital
The climate transition presents a good example of how our long-term, flexible capital can make a difference. Investors are now seeing that financing the transition may involve short-term opportunity costs that they are not ready to bear. In 2023, companies in climate tech had to continue raising capital amidst muted valuation levels. Investors saw fewer exits, and venture and growth investment in the sector declined 30% from the year prior.4 The slowdown happened despite the clear, long-term opportunity presented by the energy transition.
Patient capital like ours is well-suited to navigate climate tech’s potential J-curve. Last year, the Sustainability Solutions Group (SSG) in our Private Equity department identified companies that needed significant capex to scale up “first-of-a-kind”5 projects, which often fall between traditional capital buckets. To bridge this funding gap, we launched an investment programme for green assets, leveraging SSG’s track record and sector knowledge. Our flexible capital, enabled by a funding mechanism that adjusts for risk, positions us well to invest in the commercialisation of these decarbonisation solutions.
A Long-Standing Commitment to Partnerships
In a more uncertain world, the strong partnerships we have built over many decades are a further buttress. GIC has 10 international offices outside of its headquarters in Singapore, with investment professionals working closely with many partners in these markets. We also emphasise cross-collaboration between these different parts of GIC through multiple country and thematic business groups.
This year marks the 40th anniversary of our New York Office and the 10th anniversary of our São Paulo Office. We established the New York Office just three years after our firm’s inception. It was our first office outside of Singapore. Then, we had just 10 staff who mainly focused on fixed income. Over the last 40 years, the office has grown to become our largest outside of Singapore, with a 250-strong team responsible for deploying capital across asset classes and major investment sectors. Our São Paulo Office had similar modest beginnings, and within one decade has established GIC as one of the largest and most active institutional investors in Latin America.
Committed to Our Purpose
In a world where uncertainty has shaken the foundations of the investment environment, our response is to be ever more sure of who we are and to abide by our core investment principles. We stand committed to our core purpose of safeguarding Singapore’s financial future.
