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Singapore’s GIC positioning its portfolio more cautiously amid growing risks

GIC Private Ltd.'s annual report for its fiscal year ended March 2018, released Friday, showed the Singapore sovereign wealth fund positioning its portfolio more cautiously following another year of strong returns for risk assets.

The report showed the fund cutting its exposure to developed market equities while increasing allocations to bonds and private equity.

For the 20 years through March 31 – GIC's chosen yardstick for judging long-term investment results – the fund reported its annualized inflation-adjusted returns dropped to 3.4% from 3.7% the year before, as more of the stellar gains enjoyed during the tech boom of the late 1990s dropped out of the data.

Looking ahead, Lim Chow Kiat, GIC's CEO, in his overview of the year, flagged high valuations globally for risk assets and increased trade tensions as factors clouding the investment outlook now.

The past year's strength, with the promise of further stimulus from U.S. tax cuts, have "increased the prospects of a larger withdrawal of the decade-long extraordinary monetary stimulus" pursued in response to the global financial crisis, noted Mr. Lim.

"Monetary policy tightening poses market and economic risks even in the best of times" and limited experience in the unwinding of unconventional policies is elevating those risks now, said Mr. Lim.

The annual report noted that maintaining the discipline to take profits on high-flying asset prices remains a key to navigating the current environment.

"GIC's long-term value investing approach distinguishes price from value. If an asset's price persistently exceeds its fundamental value, we would tend to sell," even if it means going against current market sentiment, the annual report said.

For the latest year, that discipline appeared to prompt a shift out of U.S. and other developed market equities in favor of boosting allocations to bonds and private equity.

GIC reported the weight of developed market equities in its portfolio – which the fund has long pegged at "well over $100 billion" even as market veterans currently estimate its value at well over $300 billion – at 23% as of March 2018, down from 27% the year before.

The fund's allocations to nominal bonds and cash, by contrast, rose to 37% from 35%, while private equity increased to 11% from 9%.

Allocations to emerging market equities, real estate and inflation-linked bonds held steady at 17%, 7% and 5% respectively.

The latest increase in allocations to private equity lifted that asset segment's weight to the lower end of GIC's 11% to 15% target range. By contrast, real estate, at 7%, remained well below that asset segment's target allocation between 9% and 13%.

By geography, U.S. assets dropped to 32% of GIC's portfolio from 34% for the prior two years, and Australia dropped to 1% from 2%. The Eurozone, Japan and the "rest of the Americas" all saw their weights in the portfolio rise 1 percentage point apiece to 13%, 13% and 7% respectively.

Meanwhile, GIC reported nominal returns for the five-, 10- and 20-year period through March 31 which showed the fund beating its 65% equity – 35% bond reference portfolio over longer periods but trailing it for shorter time spans.

The portfolio's annualized nominal return of 5.9% for the latest 20 years was higher than its reference portfolio's 5.7% return. It's 4.6% and 6.6% returns for the 10 and 5 year periods, respectively, trailed the reference portfolio's 5.2% and 6.9% returns.