GIC has just released its 2019/2020 annual report.
The GIC’s annualised real rate of return stood at 2.7 per cent, as of March 31, 2020.
This is lower than the 20-year annualised real (meaning, above global inflation) rate of return of 3.4 per cent reported in 2019.
Who is GIC?
GIC is a fund manager that manages Singapore’s foreign reserves on behalf of its client, which is the Singapore Government.
The returns from GIC's investments is used for the Government to improve Singapore in a variety of ways, such as supplementing the nation's annual Budget.
Rolling 20-year, what?
GIC primarily measures its long-term investment returns using the rolling 20-year real rate of return.
So, how do they roll? And how does it stay real?
Instead of reporting the investment returns in yearly blocks, it reports its performance over a period of 20 years, using the metric of an annualised 20-year real return.
If you're a visual learner, here's an illustration to clarify how the rolling 20-year real rate of return changes over time:
Source: GIC
For 2020, the annualised real rate of return was 2.7 percent. This is for their investment performance between April 2000 and March 2020.
The term "real" refers to the rate of interest when global inflation is taken into account.
GIC's real rate of return has been below 4 per cent for the past 4 years
According to GIC's annual report, the 20-year real rate of return has been below four per cent for the last four years.
Source: GIC
The real rate of return has been dropping over the years, as the "exceptionally high returns" from the technology bubble in the late 1990s dropped out of the 20-year window.
Technology stocks peaked in March 2000 on the NASDAQ Composite Index and sharply declined after that point, leading to the "dot-com bubble burst".
As GIC's 20-year annualised rate no longer captures investment returns from the 1990s, the rate of return has been on a decline.
At the same time, GIC added that Covid-19 further "revealed and accentuated certain long-term vulnerabilities and trends which GIC had observed for several years".
Covid-19 was an unforeseen shock to the global economic system: GIC
According to Lim Chow Kiat, the Chief Executive Officer of GIC, the global pandemic was an unexpected event and highlighted GIC's defensive stance in their investment portfolio:
"GIC had become increasingly concerned with high valuations, weakening economic cycle fundamentals, limited room for policy flexibility and geopolitical tensions, and had positioned the portfolio defensively.
In the unexpected event of the COVID-19 pandemic, the defensive stance helped the portfolio withstand some of the more extreme market movements."
In response to an uncertain global economic environment, Lim added that GIC will continue to build a resilient portfolio to help secure the nation's financial future:
“The global health and economic outlook remains challenging. In this environment, GIC continues to proactively seek opportunities that will generate good long-term risk-adjusted returns, as well as ensure that the total GIC portfolio remains resilient to uncertain outcomes. Above all, we must stay true to our mandate, values, and investment principles as we work towards securing Singapore’s financial future.”
Top image by Matthias Ang