long-term value investing in a low-yield environment
TRANSCRIPT
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The difference time makes: Long-Term Value Investing in a Low-Yield Environment
22 February 2016
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• Mandate is Everything: GIC Secures Singapore’s Financial Future
• Market Outlook: Challenges & Opportunities
• GIC’s Approach: A disciplined long-term, value investor
• Our People
Coming upin my talk…
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Securing Singapore’s Financial Future
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• GIC was the brainchild of Dr Goh Keng Swee, then Deputy Prime Minister and Chairman of the Monetary Authority of Singapore
• He saw the need for an entity dedicated to the task of investing Singapore’s growing reserves for better long-term returns
• Created what in retrospect, was the prototype Sovereign Wealth Fund
First non-commodity based country to start a SWF
“There is no real secret about the way in which most nations and individuals grow rich. They must save a good part of their income, and have that wisely and profitably invested. The more you save and the more wisely you invest, the faster you get rich”
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GIC’s returns
benefit present and
future generations
of Singaporeans
• Investment returns of GIC, MAS and TemasekHoldings, contribute toward the annualgovernment budget
• Amounts to about S$8 to S$9 billion, or about 15%of the total budget
• The Singapore Constitution spells out a spendingrule that states the government can utilise upto 50% of long-term expected real rate ofreturn for areas such as improving physicalinfrastructure, R&D, education and strengtheningsocial safety nets.
• The remaining 50% is saved as Past Reservesfor future generations of Singaporeans.
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• Our client requires us to achieve good long-term returns to preserve and enhance the international purchasing power of the reserves
• This translates to our investment objective of: Achieving good long-term returns above global inflation, over an investment horizon of 20 years
Mandate is everything
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Low returns going forward
7
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• Cautious on the outlook for risk assets – from equities to commodities, from real estate to private equity
• Expect prospective returns – beta – to be on the low side going forward
• Work very hard to find bottom-up – alpha –opportunities to invest in the right assets, as we have the skills and the network to do so
• A period of lower beta returns, but there remain alpha opportunities – and certainly GIC remains open for business
Low beta returns, seize alpha opportunities
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A disciplined, long-term value investor
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• Only ≈5% of US mutual funds that are topquartile performers this year can be expected tobe top quartile in the next 3 years
• Would you expect a top engineer or doctor orlawyer to fall from grace as easily as a topinvestor?
• Why?
What’s the key difference between a good investor and a good engineer?
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• Not easy to beat the market; you’ll have to besmarter than many smart investors out there
• Beating the market is a relative game – notabsolute, unlike building a bridge or operatingon a patient
Beating the market is tough - but not impossible
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• What’s the GIC edge?
• How to sharpen our investment framework andprocess?
• What challenges does a low-yield environmentpose?
Questions we ask ourselves
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• Focus on long-term fundamentals that will lead to value creation
• Bring stability of capital to businesses; certainty and commitment through short-term volatility
Long-Term Investor
• Offer sizeable investment potential across the capital structure (debt, equity, direct assets) that satisfies growing and diversifying financial needs of businesses
Scale
• Invest across countries and industries, offering unique global perspectives and business insights
• Open up our truly global network of relationships to facilitate new business partnerships and opportunities
Reach
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*Entities incorporation date | ** As at 17 July 2015
Forming A Global Footprint
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GIC’s 5 investing principles
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, not predict it
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Innovative cost of capital framework,
with clear governance
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Policy Portfolio:
Key driver of risk and returns over the long term
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What’s value investing?
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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, Baupost Group
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Examples of value investments
1. De-risking and re-risking the GIC portfolio in 2007-08 and 2009
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
2. Investing in Lenovo’s inaugural $1.5bn USD bond issuance maturing in 2019
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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
Value investing: practical challenges
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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
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Higher risk, higher return 0ver the long term
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Our People
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• Being long-term in our investing approach, we are less influenced by short-term factors and market noise
• Our talent management practices focus on making GIC one of the best places in the world to build a long-term career, where we continuously grow and develop our people
• We practise long-termism in all aspects of the investing business – from investing to operations
Each of us to be the best we can be
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for updates on our investment news, corporate initiatives and insight into our company culture, or find out more at www.gic.com.sg.