July 13, 2018 / 2:38 AM / 4 months ago

Breakingviews - Sovereign investors sound market alarm

Clouds are seen above the Marina Bay Sands resort in Singapore January 24, 2011. The resort is a casino developed by the Las Vegas Sands Corp. REUTERS/Kevin Lam/File Photo

LONDON (Reuters Breakingviews) - Sovereign wealth investors are sounding the alarm. Singapore’s GIC said on Friday it had reduced its exposure to developed markets and was holding more cash, as trade ructions, tighter interest rates and stretched valuations give it pause. Compatriot Temasek and China Investment Corp have also struck notes of caution in recent days. The message is clear: modest returns are on the horizon. 

GIC, which manages $390 billion of assets according to the Sovereign Wealth Fund Institute, is not presenting a cheery picture. Stripping out inflation, its 20-year annualised real return was 3.4 percent, compared to a rolling return of 3.7 percent last year. That’s partly because lucrative investments made during the early tech bubble years are falling out of the 20-year window, but weaker down years remain. 

Inflation doesn’t make things look any better. Over 10 years and five years – though not 20 years – GIC underperformed its reference portfolio, which comprises 65 percent global equities and 35 percent global bonds. Conservative returns are driven in part by the fund’s move away from market turbulence: GIC’s volatility was lower over all three periods. 

The tone struck on Friday suggests more, not less, of that is coming. Indeed, GIC’s allocation to developed-market equities has reduced to 23 percent for the year to March, compared to 27 percent a year earlier. Cash stood at 37 percent, compared to 35 percent. The only other increase in allocations was to private equity.

Of course, GIC is still investing. It has become a more visible presence in unlisted tech, for example in Chinese delivery-to-coupons giant Meituan Dianping when it raised cash in October at a $30 billion valuation, and more often alongside Temasek. The pre-IPO investments made have been largely modest in size, though. 

Still, warnings of overstretched valuations and trade-related volatility were also heard from elsewhere. Even equity-focused Temasek, which reported a portfolio at a record S$308 billion ($226 billion) in part thanks to better performance from Singaporean banks like DBS, said it sees risks building and warned that it would pace its investment. 

If the sovereign funds are cowering, that should be enough to make ordinary investors pause, too. 

Breakingviews

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