GIC's annualised returns beat global inflation by 3.4%

The state investor expressed volatility concerns for the year ahead.

GIC achieved a 20-year annualised rate of return of 3.4% above global inflation for the financial year 2018. This means the international purchasing power of the state investor’s reserves almost doubled during the 20-year period.

According to GIC’s annual report, its 20-year portfolio volatility remained relatively low at 9.0%, reflecting the benign market environment and a cautious portfolio stance.

GIC’s computes its annualised return based on a rolling 20-year window. In recent years, it has been fluctuating around 4% but has declined below that level in the last two years.

However, the high returns from the beginning of the tech bubble period in the late 1990s have dropped out of the 20-year window, whilst the post-tech bubble declines have remained in the window. “We expect this effect to continue for a few more years, dampening the rolling 20-year return,” GIC said.

GIC CEO Lim Chow Kiat commented, “Last year saw risk assets generate strong mark-to-market returns, as the global economy experienced broad-based growth with benign inflation. Relatively strong economic recovery in the US, aided by the continued accommodative monetary policy, was further boosted by expected tax stimulus.”

Lim noted that other developed economies as well as developing economies also experienced economic recovery. “Along with the fundamental recovery, valuations remained elevated or were stretched further across a broad range of markets. The strong global growth environment has increased the prospects of a larger withdrawal of the decade-long extraordinary monetary stimulus,” he added.

GIC’s asset mix as of 31 March 2018 comprises the following: 23% developed market equities; 17% emerging market equities; 37% nominal bonds and cash; 5% inflation-linked bonds; 7% real estate; and 11% private equity.

However, GIC continued to express its worries over the “uncertainty ahead” and said they are still committed to delivering steady long-term returns on the reserves placed under their management but with a cautious stance.

“Monetary policy tightening poses market and economic risks even in the best of times; and with the limited experience in the unwinding of unconventional policies, even more so,” Lim said.

Market volatility has since picked up, but uncertainty remains elevated, the CEO said. “As a global investor, we are concerned about escalating frictions in international trade and investment arrangements. The tight integration of global supply chains will see tariffs or restrictions having a broader effect across markets than for just the countries directly affected.”

“Whilst the prospect of a near-term compromise remains possible, the deep-seated drivers behind these tensions — the lack of widespread participation in the gains from globalisation and concerns related to national security — means that these tensions are likely to stay,” he added.

Lim observed that the jump in market volatility experienced in early 2018 offered an indication of potentially bigger market turbulence and opportunities in the future.

Based on the report, 32% of the portfolio is in the US; 19% is in Asia excluding Japan, 13% is in Japan, 13% is in the Eurozone, 7% is in the rest of the Americas, 6% is in the UK; 6% is in the Middle East, Africa, and the rest of Europe; 3% in Latin America; and 1% in Australasia.