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Singapore’s famous sovereign wealth fund, the Government of Singapore Investment Corporation (GIC Private Ltd) has been charged with the task of managing the island country’s foreign reserves. With its objective of preserving and enhancing the international purchasing power of the reserves, and the aim of achieving good long-term returns above global inflation over the investment time horizon of 20 years, the sovereign wealth fund is known for its well structured investing mandate and responsible management of the government’s money.

A sovereign wealth fund normally is restricted by a strict mandate that is laid down by the government, leading them to naturally become long term investing companies because every investment decision made has to undergo strict review processes by the government before they are implemented. Shrewd and disciplined long term investors can learn a few investment lessons when looking at how a sovereign wealth fund manages the government’s portfolio. Below are three prospective lessons that long term investors can learn from the insights shared by Singapore’s GIC:

(I) Harvesting Risk Premiums By Adopting A Long Term Investing Approach

In the realm of financial markets, riskier asset classes should deliver better returns in order to compensate investors for taking on more risk. Investors trade off uncertain pay-offs for potentially higher returns over time by investing in risky assets. This extra return earned by adopting higher level of risks when investing in risky assets is known as the asset’s risk premium. However, in order to harvest these risk premiums, patience and a long term horizon is required because these so called ‘extra returns’ accumulate slowly and unpredictably over the course of time. As stated by GIC: “Successful investing, especially for a large portfolio, requires a suitably long-term horizon because economic and corporate changes often unfold across market cycles and not within a market cycle.”

(II) Build A Diversified Portfolio of Various Asset Classes

GIC invests its assets across a wide spectrum of various asset classes, thereby essentially creating a diversified portfolio for the government of Singapore. As legendary investor Sir John Templeton advocates, “Diversify. In stocks and bonds, as in much else, there is safety in numbers.” Investors would do well to have their own investments diversified across asset classes such as fixed-income instruments, real estate and equities to create a diversified portfolio.

GIC portfolio

GIC manages the Singapore government’s portfolio based upon their mandated Policy Portfolio, which comprises of the below six different asset classes:

  • developed market equities
  • emerging market equities
  • nominal bonds and cash
  • inflation-linked bonds
  • private equity
  • real estate

Often, a well diversified portfolio is amongst one of the best means with which to capture global growth and ensuring any positive surprises are captured and unwanted surprises are avoided, preventing events that would lead to an investor’s portfolio being in tatters. More information on GIC’s investment framework can be found here: http://www.gic.com.sg/en/our-business/investment-framework

(III) Be A Contrarian 

Throughout the course of financial markets history, boom and bust cycles have often led to prices of assets and securities wildly deviating from their justified fair value. The job of the shrewd, intelligent investor is to take advantage of this. As a long-term investor, GIC has the flexibility to take a contrarian stance, taking positions against the crowd when markets deviate significantly from their fair value. GIC basically buys assets when their prices are below intrinsic value and sells them when they become overvalued. However, this normally results in short term under-performance, and investors who adopt a contrarian and long term approach when managing their portfolios have to be patient and keep the bigger picture in mind. As GIC stated: “We can only enjoy the rewards of long-term investing if we are prepared to tolerate short-term losses or under-performance relative to market indices from time to time.”

(The information and chart above have been taken from an article that was sourced from the GIC Report on the Management of the Government’s Portfolio for the Year 2011/2012 released on July 30, 2012). More information about GIC can be found at their website: http://www.gic.com.sg/en/

Blessed New Year and Happy Investing in 2014!