• What’s unique about investing?
• What’s GIC’s approach?
• What’s value investing?
• What’s long-term investing?
What’s the key difference between a good investor and a good engineer?
• Only ≈5% of US mutual funds that aretop quartile performers this year canbe expected to be top quartile in thenext 3 years
• Would you expect a top engineer ordoctor or lawyer to fall from grace aseasily as a top investor?
• Why?
4
• Not easy to beat the market; you’llhave to be smarter than many smartinvestors out there
• Beating the market is a relative game –not absolute, unlike building a bridgeor operating on a patient
5
Takeaways
Questions every investor has to ask himself
• Smart enough to invest actively?
• What’s my edge?
• How to sharpen my investmentframework and process?
• What mix of active and passiveinvesting?
6
GIC’s Mandate
Our client requires us to achieve good long-termreturns to preserve and enhance the international purchasing power of the reserves
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Singaporeansbenefit from GIC's performance
• The investment returns of GIC and MAScontribute toward the annualgovernment budget to be spent forthe benefit of Singaporeans
• Each year, this contribution amounts toabout S$8 billion, or about 15% of the totalgovernment budget
• The Singapore Constitution allows thegovernment to utilise up to 50% of the NetInvestment Return
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So what’s GIC’s investment approach?
Right mix of market returns (beta) and returns from active management (alpha)
Strong governance framework
Five investing principles
1
2
3
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Right mix of beta and alpha
• Smart enough to invest actively?
• What’s my edge?
• How to sharpen my investmentframework and process?
• What mix of active and passiveinvesting?
1
12
Mix of beta
and alpha –
Considerations
• Info efficiency
• Arbitrage
• Market impact
• Transact-ion costs
• Govt’s LT goals
• GIC’s strengths
• Riskier assets
• Value strategies
4. Long-term
Impact
1. GIC’s Edge
2. Market Efficiency
3. GIC’s Size
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Strong governance framework
REFERENCE PORTFOLIO
Passive Portfolio; set at 65% global equities; 35% global bonds
Represents the government’s risk tolerance
+ =
POLICY PORTFOLIO
ACTIVE PORTFOLIO
GIC PORTFOLIO
Allocation among six core asset
classes
Key driver of returns over the
long term
Approved by the GIC Board
Comprises overlay of active,
skill-based strategies
Adopted by GIC management
Overseen by GIC Investment Board
Represents actual exposures of the
GIC portfolio
Within risk limits set by
Government
2
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GIC’s Policy
Portfolio
Private Equity
Real Estate
Inflation-linked bonds
Nominal bonds & cash
Developed Market equities
Emerging Market Equities
11%-15%
9%-13%
4%-6%
25%-30%
20%-30%
15%-20%
As of 1 April 2014
Inflation-linked Bonds
Nominal Bonds & Cash
Real Estate
Private Equity
Developed Market Equities
Emerging Market Equities
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GIC’s 5 investing principles
3
Pursue intrinsic value and maintain price discipline
Practise long-term investing
Pick our spots: be focused and leverage our strengths
Pay attention to risk control
Prepare for the future
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“the discipline of buying securities at a significant discount from their current underlying values and holding them until more of their value is realised”
Value investing, according to Seth Klarman
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Ingredients of successful value investing
• Info efficiency
• Arbitrage
• Market impact
• Transact-ion costs
• Govt’s LT goals
• GIC’s strengths
• Riskier assets
• Value strategies
4. Long-term
Impact
1. GIC’s Edge
2. Market Efficiency
3. GIC’s Size
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2. Investing in and divesting Global Logistics Properties in end-2008 and 2010
Examples of value investments
3. Investing in and divesting Springer, the world’s second-largest publisher of academic journals & largest publisher of academic books, in 2009 and 2013
1. De-risking and re-risking the GIC portfolio in 2007-08 and 2009
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• Need emotional fortitude and a disciplined investment framework/process
• Many inputs into the framework are more art than science
• Structural changes could surprise even experienced investors
• Not all points on the business cycle and valuation cycle are favourable to value investors
Practical challenges in value investing
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Having the option, institutional capability and psychological fortitude to evaluate and hold an investment for the long term if necessary
Long-term investing –a working definition
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• An option, not obligation to buy and hold
• Ex-ante, not ex-post
• Function of price, not time
• Capitalises on:
– Short-term market fads and irrationality
– GIC’s capabilities: research, processes, incentives
– Personal mental fortitude
Long-term investing in practice
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LT investing is embedded in GIC’s value strategies and policy portfolio
• Info efficiency
• Arbitrage
• Market impact
• Transact-ion costs
• Govt’s LT goals
• GIC’s strengths
• Riskier assets
• Value strategies
4. Long-term
Impact
1. GIC’s Edge
2. Market Efficiency
3. GIC’s Size
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LT investing is embedded in GIC’s value strategies and policy portfolio
• Info efficiency
• Arbitrage
• Market impact
• Transact-ion costs
• Govt’s LT goals
• GIC’s strengths
• Riskier assets
• Value strategies
4. Long-term
Impact
1. GIC’s Edge
2. Market Efficiency
3. GIC’s Size
GIC’s Policy Portfolio
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Which is a better investment?
• S&P 500 (green) or US 10-year bonds (yellow)?
• Annual return: S&P 10.5% or bonds 8.7%?
• Sharpe: S&P 0.49 or bonds 0.55?
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