FT : GIC Enjoying Huge Success Singapore Style

Wednesday, September 5, 2007

The Government of Singapore Investment Corporation has long maintained a low-key presence in global financial and property markets in spite of being one of the world’s three top sovereign wealth funds and one of the oldest.  But the secretive government agency is suddenly receiving considerable attention as other countries, including China, South Korea and Japan, seek to copy its operations in an effort to improve returns on their vast foreign exchange reserves.  GIC was founded in 1981 with assets of around US$5bn and the size of its portfolio has grown to an estimated $140bn (€103bn, £69bn) in 25 years by investing foreign exchange reserves and surplus state budget funds in global equities, bonds, property and other investments…..The fund was the idea of Lee Kuan Yew, independent Singapore’s first leader, who complained the central bank was not investing government reserves for the best long-term returns.  He decided to set up GIC with the help of international advisers including James Wolfensohn, who operated his own investment firm before becoming World Bank president.  “Investing is a hazardous business.  My cardinal objective was not to maximise returns but to protect the value of our savings and get a fair return on capital,” wrote Mr Lee, who has been chairman of GIC since its founding, in his memoir, From Third World to First.  Last year GIC revealed for the first time that it had achieved an average return of 9.5% annually in US dollar terms since 1981 or a 5.3% return over global inflation.  That is seen as a solid return for a large and conservative fund and has persuaded other governments to seek GIC advice in setting up similar vehicles.  Half of GIC’s investments are in equities, 30% in bonds and the rest in property, private equity, hedge funds and commodities.  About 80% of the portfolio is invested in the US, Europe and Japan.  GIC is barred from investing in Singapore because of fears that its huge size would distort local financial markets.  But its foreign activity has stirred much less controversy than Temasek Holdings, Singapore’s other investment company, which has encountered a nationalist backlash in some Asian countries.

GIC operates like an asset-management fund, with ­little interest in acquiring substantial stakes in com­panies.  “US university endowments have had the biggest influence in our organisation structure and designs,” Roger Sung, a ­senior GIC official, told Tufts University’s Fletcher School last year in a rare public discussion of the fund.  In contrast, Temasek has taken a more activist approach, similar to a ­private-equity fund, by buying big stakes in ­foreign com­panies and seeking some say in management, which has raised its profile and made it a target of political opposition.  GIC has been able to act without attracting much notice by using external fund managers to handle about a quarter of its assets, while making other investments through special purpose companies.  GIC’s reliance on outside asset managers in addition to its own staff of 900 people has meant that Singapore has been able to attract asset management companies to the city-state as part of its ambitions to become a regional financial centre.  The corporation has become a fertile recruiting ground to staff Singapore’s private fund management industry.  It is closely tied to the Singapore government, with all but one of its 13 board members being ­current or former government officials, GIC executives or the heads of state companies.  Mr Sung said the board represented “the de facto inner cabinet” of Singapore and “makes the major decisions for our company”.  While Mr Lee serves as GIC chairman, Lee Hisen Loong, his son and Singapore prime minister, is the deputy chairman and Tony Tan, a former deputy prime minister, is the executive director…..GIC is not required to report to parliament, although it must submit audited accounts to the Singapore president.  The International Monetary Fund has recommended that more transparency would “strengthen further public confidence”.  But the government says increased transparency would make the Singapore currency vulnerable to foreign speculators by publicising details of the city-state’s reserves.  Some analysts have suggested that GIC should give a more detailed accounting of investments made three-to-five years previously to give the public a better understanding of its performance, without disclosing its current strategy…..The secrecy that surrounds the Government of Singapore Investment Corporation and to a lesser extent its sister agency, Temasek Holdings, is not an exception in the city-state, where the government keeps tight control on information…..Secrecy also has its advantages in creating the world’s fastest-growing wealth management hub, with bank secrecy laws stricter than in Switzerland.

Reference : http://www.ft.com/cms/s/0/72305c2a-5b02-11dc-8c32-0000779fd2ac.html

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