Furry Brown Dog

Dedicated to the memory of my canine friend…

Are Temasek and GIC really better investors than Singaporeans?

with 9 comments

A common line of thought which often accompanies the defense of Singapore’s SWFs (Temasek Holdings and GIC Singapore) is that they are better investors than the common folk, that if we left Singaporeans to manage their own savings they’ll turn in meagre returns or worse huge losses due to impulsive investments.

This strain of thought is clearly prevalent in the thinking of Singapore’s founding father, Lee Kuan Yew, who has been quoted repeatedly throughout the years as denigrating the common man and promoting elitists such as himself and other scholars who are co-opted into government.  Here are a few quotes from LKY himself:

They say people can think for themselves? Do you honestly believe that the chap who can’t pass primary six knows the consequence of his choice when he answers a question viscerally, on language, culture and religion? But we knew the consequences. We would starve, we would have race riots. We would disintegrate.”
– Lee Kuan Yew, The Man & His Ideas, 1997

“I am often accused of interfering in the private lives of citizens. Yes, if I did not, had I not done that, we wouldn’t be here today. And I say without the slightest remorse, that we wouldn’t be here, we would not have made economic progress, if we had not intervened on very personal matters – who your neighbour is, how you live, the noise you make, how you spit, or what language you use. We decide what is right. Never mind what the people think.”
– Prime Minister Lee Kuan Yew, Straits Times, 20 April 1987

It is apparent from the above that Lee Kuan Yew does not think Singaporeans are capable of managing their own savings and planning for retirement.  Hence the need for CPF,  a state-run defined-contribution pension fund which mandates a payroll contribution of 33% (this varies with age, but most start at 33%) into a compulsory account which yields only a meagre 2.5% interest rate on the Ordinary Account and a variable interest rate on the Special, Medical and Retirement (SMRA) Account.  This return is not adjusted for inflation.

Apart from that the state often passes laws which make it more and more difficult for the people to withdraw their savings by mandating a minimum sum of money (Minimum Sum) one must leave in their CPF account when they finally hit 62 years of age and are finally able to withdraw a limited amount of their savings.  Even then, a newly implemented scheme known as CPF Life imposes upon every CPF depositor (ie. every salaried Singaporean worker) mandatory annuities.

Judging from the above it’s probably not too surprising if a foreigner were to conclude that Singaporeans, or people in general don’t know how to manage their own money.  Give them their savings and the next thing you know they’re driving up the next speculative bubble until it bursts disastrously.  Or that they’ll fall prey to some scam investment schemes.  The state media in particular has even gone to the extent of disingenuously distorting the losses incurred by CPF depositors who choose to take part in the CPF Investment Scheme (CPFIS), a CPF scheme which allows one to invest part of their CPF deposits in selected financial instruments approved by the government.

But enough on the people’s capability to manage their own savings. How about SWFs such as Temasek and GIC, Singapore’s SWFs who often sell bonds to CPF to raise funds for their investments?  How do they fare?

I came across a paper in April published by a Harvard professor titled The Investment Strategies of SWFs.  I did not write about it then because I was busy with other things.  But anyway…

The study attempts to understand the general behavioural characteristics of SWFs, to identify common investment strategies of SWFs in general.  Here are some of its findings.  Among other things, it finds that SWFs are often prone to trend chasing, a trait commonly associated with consumer-investors such as the average man on the street.  It concludes so by noting SWFs tend to invest more at home when P/E ratios are higher (pg 18):

SWFs are more likely to invest at home when prices there are relatively higher. The magnitude of this effect is substantial: an increase of one standard deviation of Home P/E increases the likelihood of investing at home by 6.69%. Similarly, higher P/E levels in the other countries are correlated with a lower propensity to invest at home.

The cross-sectional results suggest that SWFs invest less at home if their local equity markets have relatively low P/E levels. One possible explanation for this pattern is that SWFs shun low-valued local markets because these financial markets are not as well developed. But this hypothesis has difficulty explaining away the fact that the propensity to invest at abroad increases as the pricing level in foreign markets rises. Rather, it appears more consistent with a second explanation: the SWFs tend to ―trend chase, that is, to gravitate to markets where equity values are already high.

It also finds that SWFs tend to invest abroad when they hire foreign fund managers:

We see  that  both  funds  with  politicians  and  external managers  tend  to make  larger  investments. Interestingly, when politicians are involved, funds invest more in the home country (44% of the deals  in  the  sample),  relative  to  funds  without  politicians  involved  (only  31%  of  the transactions).  Funds  with  external  managers  involved  invest  less  in  the  home  country  (8%) relative to 36% for funds that do not rely on external managers.

Also observed was the tendency of politicians’ involvement to influence the SWF’s tendency to engage in less worthy investments (pg 28):

SWFs where politicians are involved have a much greater likelihood of investing at home than  those  where  external  managers  are  involved.  At  the  same  time,  SWFs  with  external managers  tend  to  invest  in  lower P/E  industries, which  see an  increase  in  the P/E  ratios  in  the year  after  the  investment. By way of  contrast,  funds with politicians  involved  invest  in higher P/E industries, which have a negative valuation change in the year after the investment.

Taken  as  a  whole,  our  results  lend  support  to  the  idea  that  high  levels  of  home investments  by  SWFs,  particularly  those with  the  active  involvement  of  political  leaders,  are associated  with  trend  chasing  and  worse  performance.  This  could  be  an  outcome  of  less sophisticated  decision  structures  within  these  funds  or  outright  distortions  in  the  investment process due to political or agency problems. This interpretation is also supported by our finding that politician-influenced funds invest in the highest P/E industries.

Pg 26:

Overall,  the  results suggest  that  investments by external manager-influenced  funds are associated a more positive change  in  industry P/E  in  the year after  the deal, while  in  funds where politicians are involved, the trend goes the other way.

In short, excessive governmental involvement in SWFs such as Temasek and GIC’s does more harm than good in terms of performance.  How then is the idea that the government often manages money better than the people tenable?

To make things worse, it’s also observed that Asian and Middle Eastern SWFs tend to buy up larger controlling stakes in their investments compared to their Western counterparts:

However,  columns  (2)  and  (3)  show  that  Asian  and Middle Eastern  funds  tend  to acquire  significantly bigger  stakes  in  their  target companies  than Western funds. We see that Asian funds acquire approximately 30% larger stakes in their targets companies relative to Western funds, and Middle Eastern funds acquire 37% larger stakes.

In other words, Temasek and GIC (both Asian SWFs), both of whom are largely run by political leaders have a tendency to invest a lot in higher P/E ratio industries whose P/E ratio tends to downgrade after a year.  This may have been a deciding factor in why an outsider Chip Goodyear was selected to head Temasek.  For Middle Eastern SWFs it may not matter much if losses were incurred because most of it is due to their plentiful foreign reserves from oil exports.  But for Singapore, who has zero natural resources, the only source of funds are the (coerced) savings of the population.

A common line of objection that could be anticipated against the above might be: The study’s conclusions may hold true for SWFs in general, it may not hold for Temasek and GIC.  To this, it should be replied that this automatically invalidates any contention that Singapore’s SWFs’  losses (ill-timed investments in Citi, Merill Lynch, UBS, Barclays) are acceptable because other SWFs lost just as much.

Furthermore it is clear from hindsight that Temasek and GIC were simply trend-chasing when they ploughed investments into American and European banks as they faltered in early-to-mid-2008:

“Smart Trade Group”, the Asian-based private fund, believes that losses on over $60 billion of sovereign wealth fund capital were easily foreseeable and preventable.

A source close to “Smart Trade Group” suggested that it was obvious that there was worse to follow even as firms like Merrill Lynch, Citigroup and Bank of America swallowed billions of dollars in foreign-sourced capital to bolster their battered balance sheets.

I am not endorsing the view that the investments were “foreseeable and preventable” but only pointing out that Singapore’s SWFs weren’t the only ones who were doing this.

The above analysis should bring to attention GIC’s performance and losses to date.  So far it appears only Temasek has been willing to reveal (selectively of course) its portfolio losses and gains. Nothing has been said so far about GIC, whose funds has been estimated at about US$330 bn by Morgan Stanley analysts in 2008, a portfolio far larger than Temasek Holdings’s US$127 bn.  Indeed a cause for concern for GIC’s investments are that GIC’s board of directors are stacked with politicians, a ominous trend as explained earlier.  To make things worse GIC, unlike Temasek, doesnn’t invest in domestic markets at all.  Its holdings are entirely foreign assets.  With the above in mind as well as GIC’s top management staff, it’s unsurprising that GIC has so far avoided disclosing any information on its gains and losses.

To conclude, where does this leave the conception that government knows best?  I think enough has been said above to doubt the accuracy of such an assertion.  Of course a more conclusive study, one which specifically addresses the performance of the common investor as compared to SWFs would be necessary before one may draw any concrete conclusion.  In the absence of that I leave it to the reader to ponder what was said above.  As usual all comments and feedback are welcome.

Written by defennder

May 31, 2009 at 1:26 AM

9 Responses

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  1. haha, thks for the interesting fact that, CPF onli yields a 2.5% interest rate. hee and WOOT, it will not be adjusted ( WOW, eye pop outs),

    then how to cope wif inflation, hurmph.

    plz spoonfeed me but wat does SWF stands for, me lazy to find , heez


    June 1, 2009 at 4:14 AM

  2. Oh SWF stands for Sovereign Wealth Fund, it’s basically just an investment fund which is owned by the government instead of private fund managers. And an investment fund(also known as mutual fund) is simply a company which pools together all the funds of its investors so that it can invest large amounts of money in various assets so as to maximise profits.

    Temasek Holdings and GIC are Singapore’s SWFs. GIC is charged with managing the investments of Singapore’s foreign exchange reserves, while Temasek Holdings manages some of our reserves. Some nations such as the Middle Eastern SWFs’ rely on revenue generated by oil exports for a source of funding. Singapore has no natural resources to speak of, so its SWFs receive their funding from a number of sources such as government money (paid from Singaporeans’ taxes), bonds bought by CPF, and the foreign exchange surplus.

    Hope this helps.


    June 1, 2009 at 6:18 AM

  3. […] GIC, Temasek State Funds Investments – Furry Brown Dog: Are Temasek and GIC really better investors than Singaporeans? […]

  4. Thanks for a great piece of analysis here. I have always maintained the view that our government has shortchanged its people with a mere 2.% interest rate all these years. Whereas in places like Canada their pension fund yields a minimal return of 10% +/-. With such an exorbitant amount like 330bn with ZERO transparency, I pray singaporeans will not wake up one day and find themselves to be in a place like Iceland! Overnight, their wealth has disappeared due to the bad investment and greed of its politicians. We the people need to hold PAP for more accountability, transparencies and most of all, predictability of Drawdown date that is not a shifting goalposts. What’s the purpose of having so much in reserves (are they only paper gains? one might start to question) and denying citizens their opportunities to have a decent healthcare and graceful aging?

    I get more suspicious by the days.

    Open up the piggy bank and we have the right to know where all our CPF monies stand today.


    March 16, 2011 at 2:36 PM

  5. Hi Defennder,

    Actually, the short changing of Singaporeans is really quite a lot of money. Let’s say that you have a CPF account after 10 years of working and it contains about 2 year’s worth of your annual salary. You get 2.5 percent interest from CPF. However, in reality, CPF gets 4 percent from 10-year SG government bonds. So, in fact, you’re already paying 2 x 1.5 = 3.0 percent of your annual income to the government. In reality, the foregone income is a lot higher. Conservatively, if you had invested in a mix of bonds and equities, your returns could be higher at let’s say 8 or 9 percent. So, you are already paying 2 x 5.5 = 11.0 percent ‘tax’ on CPF.

    Where does the difference between the CPF interest and the actual investment return goes to? Well, it becomes investment income for the government. Temasek Holdings (TH), after paying the 4 percent on its coupons, generates substantial income which it returns to the SG govt as investment income. Effectively, the government’s TH investment income is really the tax revenue it gets for holding onto your CPF. And it is not a small sum. You’re talking a few billion dollars here and there every year.


    March 16, 2011 at 11:28 PM

  6. @UnimpressedBudget,

    Well, your CPF money is actually held in Singapore Government Securities. As long as the SG govt can tax people and companies, you can get your money back. The last time I checked, SG govt securities are AAA rated.


    March 16, 2011 at 11:32 PM

  7. Fox & UnimpressedBudget

    The post above didn’t explicitly address whether CPF returns are adequate. I’m currently in the midst of overhauling and updating an old post which compares CPF returns with that of other similar pension schemes in other countries. I hope to be done with it soon. Getting busier with work nowadays.


    March 17, 2011 at 1:13 PM

  8. Looking forward to your post on CPF.

    I also want to point out that the meagre returns on CPF is regressive since there is a cap on the CPF contribution. High-income individuals have a smaller proportion of their wealth stored in CPF.


    March 19, 2011 at 8:48 AM

  9. Fox & all

    The post is up as promised. Would appreciate if you guys could help to read through and point out any mistakes I or errors I might have made. Thank you.


    March 19, 2011 at 5:45 PM

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