GIC's Ng retells 'harrowing' experience during the 2008 financial crisis

GIC's Ng Kok Song
Ng Kok Song, retired CIO of GIC

The decision to make a tactical cut in the Government of Singapore Investment Corp.'s equity exposure heading into the global financial crisis was a “harrowing” experience, but one that paid off for the sovereign wealth fund's portfolio, according to the fund's former investment chief.

Speaking March 13 at the annual conference of the Investment Management Association of Singapore, Ng Kok Song said he and his colleagues had to overcome their conviction that a long-term investor, which looks to be judged on 20-year returns, “should not be in the business of market timing.” Mr. Ng retired as the GIC's group chief investment officer at the end of January and now serves as adviser and chair of global investments.

“We struggled with that,” said Mr. Ng, but ultimately concerns that leverage in global markets had left risk assets dangerously overvalued prompted the investment team in May 2007 to seek the GIC board's approval to “reduce risk meaningfully in our portfolio.”

The GIC board gave its approval and soon thereafter the investment team proceeded to reduce the portfolio's equity beta exposure, mainly by selling equity index futures, Mr. Ng said.

For much of the remainder of 2007 global equity markets continued to push higher, making that stretch of time “one of the most stressful occasions” of a career that spanned more than four decades with Singapore's Finance Ministry, central bank, stock exchange and sovereign wealth fund, Mr. Ng said.

But then, with the collapse of Bear Stearns in March 2008, “the markets began to wobble,” he said, followed by a more decisive plunge after the Lehman Brothers Holdings' bankruptcy on Sept. 15, 2008.

With the steep drop of global markets that September, the GIC team concluded the overvaluation that had prompted their tactical move in 2007 had been corrected, and “we proceeded to rebuild” the portfolio's equity exposure, Mr. Ng said.

Once again, for the next five or six months, global equity markets continued to tumble and Mr. Ng said the “non-trivial possibility” of a global depression produced moments of self-doubt. It was a “harrowing experience,” but finally the strategies pursued by U.S. economic policymakers had the desired effect and markets began rebounding strongly.

While Mr. Ng didn't provide specifics, he said the GIC's portfolio benefited from the intervention. “When all is said and done, there was quite a large difference” between the value of the index futures the GIC sold and the value of the futures it repurchased after Lehman, he said.

Still, he warned that such moves, straying from long-term asset allocation, must remain rare.

In response to e-mailed questions, Jennifer Lewis, a spokeswoman for the GIC, cited a report that showed the GIC had enjoyed a roughly 30% gain from the sale and subsequent repurchase of those equity index futures.

The GIC's annual reports didn't disclose exactly how much of its equity exposure was hedged during the episode, but the report for the fiscal year ended March 31, 2009, showed the allocation to publicly listed equities falling to 38% of the portfolio from 44% the year before. Information regarding the sovereign wealth fund's equity exposure as of March 31, 2007, wasn't available.

Writing in the annual report about the GIC's investments for the year through March 2009, Mr. Ng said “we had reduced public equities by more than 10% over the period July 2007 to September 2008.” Asked whether that 10% drop was due solely to the GIC investment team's derisking moves or to a combination of those moves and market-related declines, Ms. Lewis said the GIC did not disclose details of its investment strategies.

In his March 13 talk, Mr. Ng described his team's goal as making a “meaningful” reduction in risk.

The GIC's annual report for the year ended March 31, 2008, painted the move in softer tones, noting that the investment team had decided on a “modest reduction in our exposure to public equity markets.”

On a different subject, Mr. Ng noted that while the GIC's annual reports over the past five years had helped it move up the transparency rankings in the world of sovereign wealth funds, it wasn't aiming to become No. 1.

The GIC came in third from the bottom when the Washington-based Peterson Institute for International Economics announced transparency rankings for 34 sovereign wealth funds five years ago, but came in 23rd in the latest ranking, he said. But the GIC is “not aspiring to be one, two or three, said Mr. Ng, adding that, in his opinion, there are “more disadvantages than advantages” in providing detailed disclosure.

“Every country has its own secrets. We have ours,” he said.

The GIC has no problem disclosing information about asset allocation or the geographic distribution of investments, but detailed information on individual investments could work against the investment team in times of market stress, he said, adding “we don't want to handicap the way we operate.”

Likewise, the GIC doesn't disclose the value of its portfolio. Since its first annual report, for the fiscal year ended March 31, 2008, the GIC has continued to say only that its portfolio is worth well over US$100 billion.