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Tharman’s disclosure raises more questions than it answers

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Singapore’s Finance Minister, Tharman Shanmugaratnam, whom heads the ministry which is the sole shareholder of Temasek Holdings yesterday defended the investment arm’s performance in the light of losses sustained by its BoA sale:

Temasek HoldingsSpeaking in Parliament on Thursday, he said Temasek had grown by a net S$56 billion over the course of the boom-and-bust market cycle that started in 2003.

Mr Tharman said that although the portfolio declined by S$58 billion in value between March and November last year, the fall came after a much greater gain in Temasek’s investment portfolio of S$114 billion over the previous five years.

In particular Tharman defended Temasek’s performance by citing its mean annual return rate of 15%:

“Temasek has achieved total shareholder returns by market value of slightly over 15 per cent per year on average, in US dollar terms, over the cycle. This compares with a 6 per cent annualised gain in global equity market indices.”

Clearly Tharman was being disingenuous again when he said that Temasek’s portfolio expanded by $114bn since 2003 to date.  What he did not say was how this gain materialised.  Did CPF buy more bonds from Temasek over this six year period?  Did Temasek leverage itself in the domestic market via its Temasek-linked companies?  How much capital injection did Temasek receive from the Finance Ministry over the same period?  No one knows. Merely citing the gain in portfolio is just like a gambler saying that he now has $1000 than at the same time last year, ever since he lost $450 in a failed gigantic bet just last week.  He could have borrowed the extra money.  Portfolio gain doesn’t necessarily imply net profit.

Correction: Someone pointed out to me that S$56bn gain in portfolio specifically excludes all capital injections and shareholder dividend paid to MoF.  This government source corroborates that view:

This means that even after taking into account the recent sharp decline, Temasek’s portfolio had still grown by S$56 bn over the course of the cycle. (This is after netting off all capital injections into Temasek, and dividend payments to the Government. It hence reflects only the returns on Temasek’s investments.)

I have since struck out all statements written here which stem from that erroneous claim.  Instead of deleting them I’m leaving them there as an honest acknowledgement of my mistake.

Update: Someone at SGforums.com pointed out that CPF loaned out $117bn in the form of investment to MAS in 2007 (the most recent CPF annual report available).  See page 45 of this report.  Now of course the interesting question is how much of that made its way to Temasek’s portfolio which might account for the increase in portfolio.

Update 2: TODAYonline confirms that the S$114bn excludes capital injections by MOF, CPF and others:

Temasek actually saw a net gain of $56 billion over the boom-and-bust years from 2003 to November 2008, despite the sharp $58-billion portfolio decline between March and November 2008. This is after netting off all capital injections into Temasek and dividends payments to its sole shareholder, the Finance Ministry.

Also noted was Harvard Endowment Fund’s annualised return over the same five-year period of 17.6% (financial priod ending Jun 2008) compared to Temasek’s 15% return:

The Harvard Endowment Fund, which like Temasek runs on the principle of diversification and long time horizons, delivered annualised average returns of 17.6 per cent over the five years ended June 2008, according to the annual report of the US$36.9-billion ($53.7-billion) university fund.

Updated 5th June:

Fourthly, how much of that S$114 bn came from Temasek’s sales over the 2003-2008 period of assets which it acquired from the Singapore government?  Wayang Party pointed this out in an article here:

Over a period of 10 months in 2008, Temasek sold all three Singapore power generation companies under its charge. These gencos together generate 90% of Singapore’s electricity needs.

Date Entity Sold Buyer Proceeds
Mar 2008 Tuas Power China Huaneng Group S$4.235 bn
Sep 2008 Senoko Power Japanese consortium S$3.65 bn
Dec 2008 PowerSeraya Malaysia’s YTL Power S$3.8 bn

What is not known are the transaction prices of these asset transfers between the government and Temasek. If the prices were significantly on the low side of things, the gains from the sale of these transferred entities would artificially inflate Temasek’s overall investment return.

The proceeds of the sale add up to about S$11.685 bn.  What is not known is how much Temasek paid to acquire them from the government.  What else did Temasek sell during that period?  It appears that unless Tharman explicitly ruled out proceeds from sale of companies, there is no basis for saying that the net portfolio gain during that period reflects the annualised rate of return from Temasek’s investments.  Which was probably why Tharman was careful to use the term “net portfolio gain” rather than net return from investments.

Updated 7th June: Asia Sentinel also pointed out a similar point earlier:

Singapore Finance Minister Tharman Shanmugaratnam has claimed that despite recent losses Temasek has made gains averaging a respectable 15 respectable a year. However, this was during a sustained global bull market and also reflected the fact that some of its assets were state-owned companies whose shares had been transferred at non-market prices.

Additionally, Tharman’s comparison of the average annual return rate of 15% with  the global annualised gain in equity markets of 6% is misleading.  Note that he made a very similar comparison of Temasek’s stock valuations with regional equity market indices earlier in Feb.  Firstly Temasek doesn’t own solely stocks.  Every investment fund hedges against stock market downturns by various means such as buying US Treasury bonds, hoarding gold etc.  Temasek is no exception.

Secondly, Tharman didn’t disclose how much of the 15% were from investment in foreign markets or domestic ones.  In Singapore’s uncompetitive domestic economic climate where Temasek owns controlling stakes in all of Singapore’s major corporations, turning a larger profit (via shareholder dividend) by raising fees and tarriffs on consumers isn’t too difficult a feat to accomplish.  Think of the natural monopolies or the major oligoplistic corporations in Singapore which are majority-owned by Temasek.

Now how about the performance of Temasek’s foreign investments?  Let’s cite a few.  This forumer here could help us out:

That’s right. First the GLCs are making ton of $$$ in a no competition own local turf. But when venture abroad, all fumbled big time. Shin Corp, ABC Learning, Merill Lych, and now CCB.

One of the factor Temasek is able to make $$$ so steady in early days was because govt policies sure sided her. But when move abroad, she got no “big daddy” to take care of her. Still remember David En, NOL CEO? He as a CEO was staying home reading book while his competitors are dining, drinking or entertaining the China chiefs. Why got chance to tie deals then.

As said above, Tharman offered no breakdown composition of the average annual return between foreign and domestic investments.  Temasek’s true shareholders and coerced investors (via the compulsory state CPF scheme) have no idea how much of the 15% was due to returns on foreign investments.  Why then the comparison with global market equity indices?

Moreover, given that most of Temasek’s early investments in 2003 were in Singapore, it might make more sense if we also examined the performance of the STI since then.  Lucky Tan points out the following:

It is not clear why he [Tharman] has chosen to compare with the MSCI Global Index when a large part of Temasek’s portforlio is in Singapore and the STI gained 16% in the same period.

A quick check with Yahoo Finance yields an annualised return of 15.7% for the same period.  Readers may want to verify that personally.  There goes yet another debunked talking point.

Thirdly, why did Tharman pick 2003 as a starting point for which to measure Temasek’s investment portfolio gain to date?  Could it be because 2003 was the same year stock markets started to recover from the bursting of the dot.com bubble and the negative economic consequences of the 9/11 attacks?  Or the start of the bull market run?  Anyone like to guess otherwise?

And as expected, Tharman failed to disclose the exact losses sustained by Temasek’s ill-timed foray into Merrill Lynch and its subsequent sale.  Foreign media sources estimated losses at US$4.6bn.  Tharman isn’t saying anything at all.  Nothing on Barclays yet too.

Some may argue that Tharman is probably one of the ‘better’ ministers in Lee Kuan Yew’s cabinet, but his “revelations” have shown that when it comes to substance, he’s really not an improvement over the other ministers.

Update June 5th: Wayang Party has a good article up where it puts Temasek’s performance in perspective.

Written by defennder

May 30, 2009 at 1:29 AM

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