Singapore sovereign wealth fund GIC reported Thursday that its annualized real return for the 20 years ended March 31 dropped to 4% from the prior fiscal year's mark of 4.9%, and warned of “significantly lower” returns in coming years.
In GIC's latest annual report, Lim Siong Guan, the fund's group president, and Lim Chow Kiat, deputy group president and group chief investment officer, noted that lofty valuations for global stocks and bonds, and unexciting global growth prospects “portend lower expected returns over the next decade.”
Even so, the executives predicted GIC's long-term approach to investing will allow the fund to take advantage of attractive opportunities, even in an environment where a global mix of stocks and bonds is likely to offer real returns of only 1% to 2% over the coming decade.
The latest drop in annualized 20-year returns marked the second consecutive year of heightened volatility for GIC's preferred yardstick for judging the performance of a long-term investor.
For the five years prior to the fiscal year ended March 31, 2015, when GIC reported its annualized 20-year return jumped to 4.9% from 4.1% the year before, those returns had ranged between 3.8% and 4.1% and never experienced a change of more than a tenth of a percent in any given year.
In an e-mail last year, Lim Chow Kiat attributed the surge to 4.9% to strong returns from global equities, in particular developed market equities.
At the March 31 close of the latest fiscal year, GIC's allocations to developed market equities came to 26%, down from 29% the year before. Allocations to emerging markets equities rose to 19% from 18%.
The annual report said GIC's “disciplined approach to rebalancing our long-term asset mix” ensures allocations stay within the ranges set by the fund's policy portfolio — between 20% and 30% for developed market equities and 15% to 20% for emerging market equities.
Likewise, allocations to inflation-linked bonds, at 5%, were within the policy portfolio's 4% to 6% range.
However, as of March 31, GIC's allocations to three major asset segments fell outside of the policy portfolio's respective ranges.
Nominal bonds and cash had the biggest overweight, with an allocation of 34% leaving that segment well above the policy portfolio range of 25% to 30%.
Allocations to private equity and real estate, at 9% and 7%, respectively, both remained 2 percentage points below the bottom of their ranges of 11% to 15% and 9% to 13%.
The geographical mix of GIC's investments was little changed over the past year, with allocations to North and South America slipping to 42% of its portfolio from 43% the year before, and Asia edging up to 31% from 30%. Europe, Africa and the Middle East was unchanged at 25%, while Australasia held steady at 2%.
GIC provided annualized nominal return data for the five, 10 and 20 years through March 31, which showed the fund outperforming its 65% equity-35% bond reference portfolio for the 10-year period and underperforming for the five- and 20-year periods.
The annual report attributed GIC's 20-year underperformance to the fact that it maintained a heavy weighting to low risk assets in the early part of the period, with “as much as 30% in cash until the end of the 1990s.”
For the five-year period, GIC said its relatively high weighting to emerging market equities, during a stretch where developed market equities have posted relatively strong gains, left its nominal returns of 3.7% trailing the reference portfolio's annualized 4.6% gains.
Even so, in the annual report, GIC stood by its assessment that overweighting emerging market equities will deliver long-term outperformance.
The latest annual report said GIC anticipates “significantly lower and more volatile returns in the next 10 to 20 years,” which could lead its investment team to adjust parts of its strategy as conditions change — exploring new asset classes and portfolio construction approaches. It didn't offer any details.