By Chris Kuan
This is a more in-depth look into Temasek’s latest performance after I have peruse Temasek Review 2016. I won’t touch on too many details – go to the online version if you need to. It is user friendly, contains lots of information but omitting some critical ones. You will need some financial know how to understand the context.
To reiterate, the year on year return fell by S$24 billion from S$266 billion, a negative return of -9%. The 10 and 20 year rolling return continues to decline in recent years to 6%. 69% of its exposure is to Asia. only 27% to North America, Europe and ANZ. It has around 10% of its portfolio in cash or cash equivalent, generally a good position in falling markets.
Yesterday, ChannelNewsAsia reported Temasek as saying that “the decrease reflects share price declines of its listed investments, which was offset by the performance of unlisted assets.” I did not find this in Temasek Review 2016. It could either be a misreporting or it is a statement made by Temasek during the press briefing.
Unlisted assets comprised 39% of assets. If Temasek made that statement, then clearly there is a significant divergence between the change in values between listed and unlisted assets given the -9% year on year result was much lower than expected (I was expecting -20%). When yours truly was gainfully employed, an explanation of not just the overall result but any material divergence in the components in that overall result needed to be provided at the weekly portfolio meeting. Be it as it may, if indeed such an event has occurred over the past year between listed and unlisted assets, it is a material event that ought to have clear disclosure from Temasek on which unlisted assets provided the offsets and what is the basis in which the valuation is made since unlisted assets do not have a market price.
Temasek reported that over the past 10 years S$206 billion had been invested. This looks huge but after accounting for divestments, net investments is S$68 billion. Temasek also reported that dividend income average S$7 billion a year in the same period. With net profits of S$140 billion over the same period, taking into consideration the cash and cash equivalent, it seems to infer that Temasek is paying between S$4-5 billion a year to the government to cover expenditures.
I am not one who says Temasek lost lots of monies over the years – this claim mostly from social media is not supported by evidence. But that is not the same as saying that Temasek is a excellent portfolio manager. Let us look at the long term rolling rate of return.
First and foremost, we should be not be too hung up about short term year on year results although by themselves they are important. We ought to assess performance over longer periods. Neither should we get worked up over individual losses because overall results is what matters ultimately.
Nevertheless, the 10 and 20 year rolling return of around 6% do not suggest to me that Temasek’s track record is especially good. Its own disclosure has shown that Temasek has failed to meet its internal rate of return hurdles over the last 20 years. That is to say, once the boost to returns provided by the public listing of Government- Linked-Companies (GLCs) – the boost resulting from the difference between market prices and the legacy nominal values at which GLCs were transferred to Temasek – has faded, Temasek’s 6% long term returns has been unable to meet its own hurdles.
Further, the 10 and 20 year returns of 6% is not much different from GIC and slightly lower than Norway’s Government Pension Fund (GPF). The layman tends to look at the overall returns only but there are significant variations between two portfolios or two asset managers earning the same returns that evidenced one is better than the other. Last year I have written that Norway GPF is more akin to GIC than to Temasek and that although Norway GPF earned a slightly higher return than GIC – this is almost entirely explain by GPF’s portfolio metrics implying a more risky portfolio than GIC suggested by its own portfolio metrics. Therefore if Temasek is generating a rate of return on par with GIC and GPF then I would say Temasek is underperforming because its portfolio contains far higher risk than the two asset managers. This evidenced by the volatility of its returns (+19% last year -9% this year as an example), equities only exposure, large exposures to high risk markets like China, smaller exposures to North America and significant risk concentrations (e.g. owning large blocs of shares).
Of course, Temasek as an investment holding company is not like for like to GIC and GPF but perspective about its returns matters. I am not one who says Temasek is opaque, its annual Temasek Review provides lots of information but a lot more disclosures need to be made in the interest of transparency. The issue with the valuation of unlisted assets is a case in point.