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One of the world’s biggest investors is reducing bond holdings

·4-min read
Aerial view of high futuristic skyscrapers in the heart of Singapore City, seen a sunny day in the summer in Southeast Asia.
Singaporean sovereign wealth fund GIC is planning to cut its holdings of bonds. (PHOTO: Getty Commercial)

By David Ramli

(Bloomberg) — Singaporean sovereign wealth fund GIC is planning to cut its holdings of bonds as it prepares for a long-term future with “significantly” lower returns amid geopolitical uncertainty and rising yields.

The firm, which the Sovereign Wealth Fund Institute estimates runs about US$453 billion, on Friday reported an annualised real return of 4.3% for the 20 years ending March 31, its best performance since 2015. The five-year nominal return rose to 8.8%, the highest since 2014. The fund doesn’t publish one-year results or its assets under management.

But while rebounding global markets and new niches will continue to offer near-term growth, the massive investor predicted lower returns over the next five to 10 years as inflation, rising yields, high valuations and lingering effects of the pandemic threaten to erode gains, according to its annual report.

GIC may not be the only institutional investor trying to work out how to overcome the faltering performance of traditional 60/40 portfolios, but it’s certainly one of the largest. Its leaders have repeatedly warned that both the juice and the safety bonds once promised are eroding, which in turn will hurt total returns.

“The point to make is that in aggregate, they are significantly, significantly lower that what we have been able to enjoy over the past 20 years,” Chief Investment Officer Jeffrey Jaensubhakij said in an interview ahead of its results, referring to projected returns for the fund.

Bearish on Bonds

GIC reduced its bond and cash holdings over the year to about 45% of assets from 50%, and plans to reduce them further given the prospect for higher yields — and lower prices — for fixed income. Jaensubhakij said the firm recognises that bonds and cash represent “guaranteed low returns” as opposed to the potentially low returns offered by other assets.

“We are looking to move some asset allocation further out of those assets,” he said, adding that some riskier alternatives are also at higher prices. “So we’re in that unenviable position of trying to decide between two not so good alternatives.”

Chief Executive Officer Lim Chow Kiat said the bond market poses a universal problem for all investors, reflecting a longer-term, low-return theme that GIC has touched on for several years.

“It’s something that’s very challenging but we try our best to find, in other asset classes, opportunities to augment the overall portfolio return,” he said. “Bonds give the clearest indication of the expected returns because today’s starting bond yield gives you a lot of clues.”

Rebounding performance

Despite the longer term concerns, GIC is the latest institutional investor to report bumper results thanks to a stimulus-fuelled recovery in public and private markets. Its Singaporean peer Temasek Holdings Pte last week reported its biggest annual return since 2010, while a Kuwaiti sovereign savings fund had a 33% gain over the same period.

“It’s been a good recovery for almost everything,” Jaensubhakij said, adding that public market gains also buoyed returns for private investments looking to list.

While the U.S. remains the single biggest source of GIC’s assets at 34% — down from 36% last year — Asia excluding Japan is a fast-rising category, making up 26% of the mix. Japan saw the biggest decline.

Geographic mix in %

2020

2021

United States

36

34

Asia ex-Japan

20

26

Japan

14

8

Eurozone

10

9

Middle East, Africa and the rest of Europe

5

5

United Kingdom

5

5

Latin America

2

3

Global

8

10

Short term growth

Overall, GIC is bullish on the short-term prospects for global markets thanks to the success of vaccines in combating Covid-19. Central banks around the world are also slashing interest rates and pumping in huge amounts of stimulus - much of which is yet to be spent.

“Near term, from a growth and corporate earnings perspective, we are quite positive,” said Jaensubhakij. But the uncertainty caused by lumpy vaccine rollouts and new potential variants, rising inflation and higher bond yields are all negative factors. “There is good reason to be cautious about the overall returns environment over the next five years or so.”

GIC’s solution will be to find niches, such as digital technology to help industries transform, sustainability and even businesses hit by geopolitical strife. GIC is a major investor in startups and data centres, and has teams looking for opportunities across the Chinese stock market, he added. The fund also plans to open an office in Sydney next year to target real estate and other assets in Australia.

© 2021 Bloomberg L.P.

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