Thursday, June 09, 2011

Safeguarding our reserves - investment policy

Dear Mr Tan,
I applaud you for stepping forward to offer your candidacy in the upcoming Presidential Election. I am glad we will likely see a contest. May the best man win for the good of our homeland.

I am an investment manager and wealth manager working for a global financial institution. In the course of my professional career, I have played multiple roles including managing money for institutions and wealthy individuals. For all these investors, there are always varying investment objectives and targets as the funds always have differences in use.

This should be no different when dealing with funds belonging to the nation, hard-earned monies from our forefathers. Just like a patriarch who stores his wealth, hands over to future generations, one would imagine that the purpose (investment objective) of such a fund would be: saving for the future, saving for "rainy days" and enhancing portfolio value to retain and grow future purchasing power.

While I believe that it is beyond to remit of the Elected President to involved himself in the operations of our sovereign wealth funds, I hope the EP will question GIC and Temasek on the basis of their performance and exposure reports which I would imagine is submitted to the EP.

I echo your call to urge GIC and Temasek to adopt a more conservative investment approach instead of going for the "big bang". In lay man's term, the way I would re-phrase the investment objectives I stated above for the SWFs is : "first, don't lose money. Second, retain its value. Third, grow and enhance the value sensibly". Given these objectives, looking back, it is questionable why GIC and Temasek went "big" into investments in Citi, UBS and Merrill Lynch. 


It is not too long ago that you were helping investors with bad investments in Lehman mini-bonds. It was on the back of that episode that we saw the sudden emergence of terms like "suitability check" for investors. My question is: Do the "aggressive" approaches adopted by our SWFs meet the "suitability check" for our reserves? Do our reserves deserve sensible and conservative investment objectives I had stated above? If we stretch our imagination further, it beats me why town councils went into Lehman minibond which were clearly not bonds even though the names implied so.


Another question relates to Temasek. It was set up many years ago as a holding company for our strategic holdings in companies like SIA, Singtel and DBS. This was a good move. As we know, the government divested some of these holdings in the 1990s and Temasek started to use the proceeds of those sale to go regional and invested in companies like the ICICI, the former ABC Learning and others. So, Temasek has deviated from the original "path". While we applaud Temasek for doing their annual reports, I think it is best to segregate the strategic holdings like SIA from other active investment decisions like buying and writing off ABC Learning. The rationale is very simple. I am quite sure Temasek management has no powers to actively trade SIA, DBS and other strategic holdings. So, their value-add to the citizens is in the non-strategic holdings.

We should know how they have performed without the strategic holdings so that they get the rightful credit and blame. Ideally, it would be better for Temasek to retain its original role. They can invest excess cash from sale of strategic assets but it must be properly accounted for. 


A better way is that Temasek can invest those proceeds via a separate vehicle so that that vehicle alone can capture all the active investment decisions taken. Temasek already owns two fund management units, Fullerton Fund Management and Seatown. 
Why don't either or both of these be wholly responsible for those active investments. This will provide full transparency on the real performance of the Temasek management minus the strategic holdings.


During a recent press conference Dr Tony Tan hosted to announce some management changes in the GIC, his Chief Investment Officer categorically stated that the fund has returned to pre-crisis level. What was the reference point? How do we define pre-crisis period? It was publicly reported that the fund has slightly more than half the fund invested in global equities. If we simply look at the MSCI World stock index, the highest level the index attained pre-crisis was in Oct 2007 at 1686.32. Yesterday, the same index was at 1301.84. Assuming half their investments (i.e. in equities), the other half must have done extremely well to claw back return performance back to pre-crisis level. Question is what kind of "turbo-charged" investments did they make that helped so much? Granted it might have performed well to help portfolio returns, were they suitable investments for a fund like the GIC? I have to assume that the claim about the fund being back to pre-crisis levels. Thus, my concern about the type of risks they took to achieve that.

Wishing you success in the elections.
HZN.

3 comments:

  1. Hi Mr Tan, can i ask what is your opinion on our gold reserves? I will present in the next paragraph why MAS should increase our gold reserves substantially. Most of our gold was bought by our former great economic minister Goh Keng Swee who realized the importance of a real asset like gold as an insurance for any serious economic turmoil and currency crisis. Although our foreign asset reserves has increased tremendously in the past 20years, the % of gold as a part of that is minuscule.

    Unlike in the 1990-2000 when central banks around the world are gold sellers, the trend has reversed from 2001 onwards with an acceleration of buying of gold by countries like china, india, russia, mexico, saudi arabia in the past 5 years. The reason that these countries are buying gold is to hedge against a world whereby the US is no longer the reserve currency.(Of course this might not happen in the next 2-3 years but longer term like how the British pound lost its reserve currency status to the US, the dollar itself might over the next 10 years become more irrelevant) As such our gold reserves as a percentage of our foreign reserves are too low for being a good hedge, a better percentage is at least 10%.

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  2. Maybe it has hantum buta stratezy/tragedy hoping luck is on their side that it recovered to pre crisis level.But what is the pre crisis level? Not disclosed in the report, hor.

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  3. Funds can be increased in a number of ways. It may be due to profits from sales of and/or unrealised capital gains on non-strategic assets. Temasek's management should be given credit for these. On the other hand, if the increase is due to injection of capital, realised and/or unrealised gains from strategic asset sales then the management of Temasek should not take credit for them. Therefore a true performance indicator is one where these 2 distinct sources of funds are accounted for and analysed separately.

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