GIC has just published its 2020/21 report and, as always, is very conservative in the way it presents the data. This is typical of the corporation, which focuses on highlighting the lowest actual figures (i.e., adjusted for inflation).
As you can see in this chart, it seems not at all impressive:
It seems that it is part of the general policy not to boast of the success in investing money that is kept as reserves, so as not to draw unwanted attention from both abroad and the country (where many might begin to ask- I know why investments can’t be spent more generously) among people).
GIC reported that its 20-year annualized real rate of return has reached 4.3%, compared to 2.7% last year at the height of the pandemic-induced stock market collapse.
It may not seem at all remarkable, but there is a bit that we need to unpack before we can compare the numbers with anything else.
Investments are typically valued at their nominal rate of return, but, as I said, GIC takes a conservative approach in correcting their numbers for inflation. Once we recover this adjustment, we can see what really happens.
What a difference a year ago
Annual and nominal rates of return are 8.8% for the five-year period, 6.2% for the 10-year period and 6.8% for the last 20 years.
It means that, in the last five years, the cumulative return on investment is 52.4%, 82.5 per cent during the last decade i 272.7 per cent during the 20-year period. In this latest figure, GIC has actually surpassed the US stock market, which grew by around 220% between 2001 and 2021.
It is worth noting that these figures were not so high last year, when stock markets sank just before the end of GIC’s financial year on March 31, which reduced them to 21%, 66 % and 145.8%, respectively.
Indirectly, it shows us another reason why GIC insists on reporting inflation-adjusted annualized figures over long, non-year-over-year periods. A single year can have a huge impact even on long-term accumulated figures, especially if the annual report comes at a bearish or stock market time.
This year, the 20-year average included a sharp rise in equities during 2020/21 and a fall from the fall of 2000/01 after the dotcom bubble.
Whenever these numbers increase, it would be great news, but the opposite is also true.
Strong declines due to unpredictable crises would fuel criticism, mostly because most people don’t understand exactly what they mean. It is therefore understandable why GIC chooses to emphasize more conservative metrics.
However, as it is today, GIC has halved its portfolio in the last five, almost doubling in ten and almost tripling in twenty years.
Some people may start to point out that stock markets have performed better (at least in the last five or ten years), but in reality, GIC keeps its money safer.
Only 65% of its portfolio could be invested in equity or other risky assets (actually it is currently much less). The risk profile of these investments is more conservative than that of a volatile stock market that may experience huge year-on-year fluctuations.
This is particularly important, as GIC indirectly manages the money from the Central Providence Fund (CPF), after the fund has exchanged it for government-backed special securities, from which it lands GIC for a profitable investment.
45 percent of the funds remain in bonds and cash, eight percent in solid real estate, meaning more than half is stored securely, out of volatile stocks, while the entire portfolio continues to produce a commendable ROI.
Despite all these limitations, GIC has a performance almost as strong as Temasek Holdings and, let’s not forget that in a longer period of time than 20 years, it has actually outperformed the stock markets.
This is not a bad feat for a government corporation (which cannot take as many risks as stock traders) for a period from the dotcom bubble to September 11, through the financial collapse from 2008/09 to the COVID-19 pandemic.
While you may read about fairly small figures that are published in today’s news, they actually add up to much more than it seems at first glance.
Featured Image Credit: Reuters
