Temasek’s 24.5% return greatly underperformed against benchmark MSCI World Index

Last Sat (17 Jul), a member of the public, Mr Alfred Chan Hock Yuen, wrote to ST Forum commenting on the recent seemingly superb financial performance of Temasek Holdings (‘ST Forumer calls for more public discourse on how well has Temasek really been doing over the years‘).

Temasek reported that it achieved a 24.5% shareholder return last year, the highest since 2010. This was also reported by Straits Times (ST) last week (14 Jul). In fact, Temasek even took out a full 2-page advertisement on the Straits Times announcing its success:

In its report, ST praised Temasek, “Singapore investment company Temasek’s shareholder return climbed smartly in its latest financial year.”

“Temasek’s portfolio was valued at a record $381 billion as at March 31, up from $306 billion a year before,” it added.

However, Mr Alfred Chan wasn’t impressed. He revealed, “A one-year return of 24.5 per cent sounds impressive until one realises that, over the same one-year period to March 31, the MSCI World Index went up by about 45 per cent.”

“The world markets have recovered massively over the past year or so and, as they say, a rising tide lifts all boats,” added Mr Chan.

“What was also interesting was that Temasek’s total shareholder return for the 10 years to end-March last year was 5 per cent per annum. Over this same period, the MSCI World Index went up by an average of about 7 per cent per annum.”

“How well has Temasek really been doing over the years? Is it reasonable to expect Temasek to at least beat the relevant market indices over the long run?” he asked. “I hope there can be more public discourse on these questions.”

MSCI World Index went up more

The MSCI World Index is a market cap weighted stock market index of 1,583 companies throughout the world. It is maintained by MSCI, formerly Morgan Stanley Capital International, and is used as a common benchmark for global stock funds intended to represent a broad cross-section of global markets.

The index includes a collection of large and mid-cap stocks across 23 markets of developed countries, and covers approximately 85% of the free float-adjusted market capitalization in each country. The index was started back in 1969 by Capital International to mirror the international markets outside the US. When Morgan Stanley bought the licensing rights to Capital’s data in 1986, it began using the acronym MSCI.

In fact, actual data from MSCI World Index revealed a whopping 57.9% increase from 1 Apr 2020 to 31 Mar 2021 in the same reporting period as Temasek’s:

  • 1 Apr 2020 – 1781.27
  • 31 Mar 2021 – 2811.70

That is to say, if one was to buy into one of those exchange-traded funds (ETF) that track the MSCI World Index, one would be able to get similar gain in roughly the same order of magnitude, since ETFs simply copy a market index one-to-one, and can be traded any time on the stock exchange like a share additionally. However, due to the various management fees and expenses, ETFs’ gain would not be exactly the same as the index gain.

As can be seen in one of the popular MSCI World Index ETFs managed by HSBC, the one year return over the same period was 50%. In other words, if one was to buy into the HSBC ETF on 1 Apr last year and sold on 31 Mar this year, one would have realised a return of 50%, twice that of Temasek’s:

Few fund managers could beat the market

In investment, the phrase “beating the market” means earning an investment return that exceeds the performance of a stock market index. In the case of international investors, their performance is typically pegged to the famous MSCI World Index. Many have tried but few can succeed.

According to an article from Financial Times, research has found that fewer than a quarter of active equity funds beat benchmarks in 2018. In the Equity World segment, which included analysis of 700 global funds, only just 22 per cent beat the MSCI World index in 2018. The study was based on the outperformance ratio, which measured by peer group the share of actively managed funds that beat their respective benchmark over the period under analysis.

A Forbe’s article published in Sep last year also stated that beating the market is hard. Forbe quoted a study by Vanguard which found that only 18% of active fund managers beat their benchmarks over a 15-year period.

It remains to be seen if Temasek can beat the MSCI World Index in the long run but it is safe to say that if Temasek has invested all its money in MSCI World Index ETFs in the last financial year, it would have achieved twice their reported return of 24.5 percent, even accounting for ETF management fees and other expenses.

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