GIC has just published its 2020/21 report and, as always, is very conservative in presenting the data. This is typical of the company that focuses on highlighting the lowest real (i.e., adjusted for inflation) numbers.
As you can see in this graphic, it seems pretty nondescript:
Annualized rolling 20-year real return on the GIC portfolio since 2001 / Image source: GIC
It seems part of the general policy not to brag about success in investing funds that are held as reserves so as not to attract unwanted attention both abroad and domestically (where many wonder why the investments are not can be spent more generously among the people).
GIC reported that its rolling 20-year annualized real return has reached 4.3 percent, down from 2.7 percent last year at the height of the pandemic-induced stock market collapse.
It might not look remarkable at all, but we still need to unpack a bit before we can compare the numbers to anything else.
Investments are usually valued on their nominal rate of return, but as we said, GIC takes a conservative approach to correcting its numbers for inflation. Once we undo this adjustment, we can see what is really going on.
What a difference a year makes
The nominal annualized return is 8.8 percent for the rolling five-year period, 6.2 percent for 10 years and 6.8 percent for the last 20 years.
Image source: GIC
That means the cumulative return on investment over the past five years 52.4 percent, 82.5 percent for the past decade and 272.7 percent over a period of 20 years. With that last number, GIC even outperformed the American stock market, which grew around 220 percent between 2001 and 2021.
Notably, those numbers weren't quite as high last year when stock markets fell to 21 percent, 66 percent and 145.8 percent, respectively, on March 31, just before the end of GIC's fiscal year.
Indirectly, it shows us another reason why GIC insists on reporting annualized, inflation-adjusted numbers over long periods of time rather than annually. A single year can have a huge impact on even cumulative long-term numbers, especially if the annual report is published at a time of a bear or bull market.
This year, on a 20-year average, stocks saw a strong rebound in 2020/21 and a decline from the 2000/01 crash after the dot-com bubble.
Whenever these numbers go up it would be great news, but the opposite is also true.
Strong slumps due to unpredictable crises would fuel criticism, especially since most people do not understand exactly what they mean. So it's understandable why GIC chooses to emphasize more conservative metrics.
As it is today, however, GIC has halved its portfolio in the past five years, almost doubled it in ten years, and almost tripled it in twenty years.
Some people may start off by pointing out that stock markets have done better – at least for the past five to ten years – but the reality is that GIC is keeping its money safer.
Only up to 65 percent of the portfolio could be invested in stocks or other risky assets (in reality, there are much less right now). The risk profile of these investments is more conservative than that of a volatile stock market, which can fluctuate tremendously year-on-year.
This is especially important because GIC indirectly manages funds from the Central Provident Fund (CPF) after the fund swaps them for special government-backed securities, the proceeds of which go to GIC for profitable investments.
45 percent of the funds are held in bonds and cash, eight percent in solid real estate – i.e. more than half is safe from volatile stocks, while the entire portfolio still generates a commendable ROI.
GIC's asset mix shows a conservative, risk averse investment approach – which has still produced strong results / Image Credit: GIC
GIC's policy portfolio outlines the investment approach / Image source: GIC
Despite all of these limitations, GIC is almost as strong a performer as Temasek Holdings and, let's not forget, it actually outperformed the stock markets over an extended period of 20 years.
This is not a bad performance for a government company (which can't take as much risk as stock traders) over a period from the dot-com bubble and September 11th to the 2008-09 financial crisis to today's COVID-19 pandemic.
While you might read of pretty small numbers in today's news, they actually add up to a lot more than it first appears.
Featured image: Reuters