On Thursday, July 12, GIC announced the results of their investments for the financial year ending on March 31 2018, with a 20-year annualised real rate of return of 3.4%.
GIC's annual report also spoke at length about their investment in technology as recent trends have seen technology reshaping entire industries and categories.
In total, 4 key trends have been identified by GIC as the driving force of technological reshaping.
These trends are:
1. Disruption of an industry by companies outside of a traditional category
To help you understand what disruption is, let's talk about Airbnb. Airbnb is considered a disruptor in the hospitality industry because it has changed the way travelers have come to consider their accommodation options while on holiday. Instead of staying in a hotel, travelers now have the option to stay in someone else's home.
For GIC, the emergence of such disruptors outside a "traditional category" means that there is now a need to look beyond "traditional categories" for investment opportunities.
In response to a question on the percentage of investments in technology companies and whether this percentage would increase, GIC Chief Investment Officer Dr. Jeffrey Jaensubhakij stated that as technology is affecting more and more sectors, sometimes, it's hard to define the percentage of investments purely in technology.
This is due to the fact that sometimes, the most interesting development about technology can occur in a non-technology company such as Amazon, which is considered a consumer platform.
Jaensubhakij added that this meant GIC would aim to invest in companies and industries that use technology well, such as insurance companies that invest in technology to manage their customers better although they cannot be classified as technology companies per se.
2. Disruptor-incumbent interactions
Accordingly, "incumbent" companies that already exist in a disrupted industry will face greater competition.
This is by no means a bad thing as it means "incumbent" companies will have to improve their choices and experiences for consumers.
What's more, start-ups can also provide the "innovation capacity that large companies need", especially if the disruptors are seen as creating value.
As GIC further elaborates in their report:
"Companies are setting up corporate venture funds and incubators, so as to discover, work with and invest in promising start-ups. By providing start-ups with better resources, networks and business platforms, they also improve the chances of their success."
The report adds that "the pharmaceutical industry is one such industry where large companies are licensing drugs developed by smaller start-ups."
Jaensubhakij noted that it also means there is now a need to work harder at looking for differentiated products and outliers for attractive investments.
3. Formation of new business ecosystems
Another key trend is how technology has enabled the formation of new business 'ecosystems' which can serve as an effective strategy in a environment that is now increasingly competitive.
The creation of digital platforms by large technology companies such as Facebook have allowed "different component businesses" to "reinforce each other".
The GIC report elaborates that such platforms allows for "customers to be 'locked in' through the platforms via multiple channels such as e-commerce, search, social media and entertainment".
This results in a network effect for investors where the customer base is expanded by the digital platforms and provides an 'investor surplus' as further profits are earned without the need for additional capital from investors.
Such 'ecosystems' also have the potential in forming a new category of companies.
4. Innovation in China and India
Finally, emerging markets, especially China and India, are seeing their own wave of innovation and have a faster learning curve relative to developed markets.
GIC states that this is due to the countries' "greater openness to experiment, less mature industries, fewer legacy arrangements, underserved customer base, and strong talent pool."
Citing the examples of how in China, one can have everything delivered to you in an hour and that all kinds of services be found on the mobile phone, Jaensubhakij stated that this showed how China's business model in innovation and technology is ahead of the world.
Jaensubhakij further added that this also places China at the frontier of technological advancement and above all, makes it an advanced and innovative market.
On the subject of India, Jaensubhakij said a different approach was required due to lower GDP per capita and penetration of smartphones among the population. This makes India a younger market that is in some ways behind China .
However, given the Indian government's push for IT in education and allowance financial institutions to use their IT system, Jaensubhakij said this meant India has positioned itself in a place where technology can really open up.
5. Bonus: Blockchain and cryptocurrency
When Mothership asked GIC about its stance on blockchain technologies and cryptocurrencies, and whether cryptocurrencies was worth the risk, Jaensubhakij said that although blockchain has potentially myriad uses as a technology to authenticate transactions and increases the efficiency of transactions, its applications have not been fully rolled out yet, apart from cryptocurrency, as it is still in the very early stages.
He did acknowledge however that it was interesting to watch how blockchain is being used for business plans and finance, and that GIC is watching it carefully for now.
On cryptocurrency, he said that there were issues with it such as the fact that it is not legal tender and therefore cannot be exchanged for goods and services as it requires the confidence of the other party to take it.
Moreover, given that anybody can create a cryptocurrency very quickly, this raises the question of whether anyone will still stay with one or two cryptocurrencies which makes it highly speculative and not something that is set for institutional investors.
But the biggest reasons why cryptocurrency is not attractive to institutional investors is because, according to GIC Chief Executive Officer Lim Chow Kiat, it does not have regulatory safeguards.
Lim concluded that ultimately, cryptocurrency is something that goes against GIC's investment mandate which is to:
"Preserve and enhance the international purchasing power of the reserves we manage."
Top Image from Taavi Rõivas Twitter