BT: GIC; Look after the downside, the upside will look after itself (28 Jan 2008)

'Look after the downside, the upside will look after itself'

'OUR philosophy is, if you look after the downside, the upside will look after itself.' So says GIC deputy chairman Tony Tan about the investment agency's 'risk over returns' approach. 'When we consider an investment, we always look at the risk first, whether it comes within our risk management framework, whether it is not excessive,' Dr Tan, who is also executive director of GIC, told Singapore reporters in Davos. 'Having decided that the risk is acceptable, then we look at the returns.'

GIC assesses not only financial risks but also political and institutional risks. Since its early days when its mandate was to earn a rate of return that at least offset average global inflation, GIC has always taken a very conservative approach to its investments, he explained.

'Today, we conduct our investments under the risk parameters specified by the Ministry of Finance. We adhere rigorously to these risk parameters. We don't breach them at all.' The approach has not hurt: GIC's returns have averaged a 'respectable' 9.5 per cent in US dollar terms over the years, he said.

Hence its investments in UBS and Citigroup have been structured in the form of convertible notes that provide some downside protection. But it does not mean that GIC takes no risk at all, Dr Tan said. 'If we take no risk at all, we would do nothing at all.'

But one GIC trait that has had to go, if not totally, amid the recent spotlight on sovereign wealth funds, is staying low-key.

'The environment in which GIC was able to operate in the 1980s, for example, where we kept very much below the radar screen and there was very little notice taken of GIC, is the way we would like to conduct our business,' Dr Tan said. 'But we also know that we have to change some modes of our operation. The Ministry of Finance has agreed that in the coming months, GIC will disclose more. We'll be more transparent in some of our operations.'

It will, for example, disclose its returns more regularly, though probably not every year.

Noting that the last time GIC announced its rate of returns was in 2006 at its 25th anniversary celebrations, Dr Tan said: 'It's impossible to do it only once in 25 years, we'll do it at regular intervals.' But it also does not make sense for GIC, a long-term investor, to report yearly figures, 'which may vary widely'. 'So we'll probably do it in some form of average 10-year returns. But we still have to settle this and discuss with the Ministry of Finance.'

Meanwhile, GIC is drafting a 'document' - possibly by the second quarter - that tells more about its investment process and purposes, and governance.

Dr Tan said it would be 'good for GIC over the next few months or years (to) become much more open with regard to our investment process', particularly as GIC has over the years been venturing beyond its main markets - the US and Europe - to higher-risk emerging markets.

The Singapore public has a right to be concerned about whether the 'hard-earned' national reserves are invested recklessly. 'We have a fiduciary duty at GIC and it is good that GIC, the Ministry of Finance, explain this to the public.'

Offering a peek into GIC's books, Dr Tan told the reporters how far the agency has come since its 'very modest' beginnings investing in public equities and bonds in the US and Europe. Today it is invested in 'more than 30, 40 countries in all the asset classes - public equity, bonds, hedge funds, commodities, private equity, venture capital'.

And while some 80 per cent of its assets are still in the American and European markets, GIC has steadily increased its investments in markets like China, India and South-east Asia that offer higher returns - at 'of course, higher risks'.

GIC has also raised its stakes in the private markets, including private equity, venture capital and real estate. 'Asset allocation is probably the most important investment decision which we make in GIC - what currencies we should invest in, what markets, what sectors. If we get that right, it probably accounts for about 90 per cent of your success.'

Dr Tan said the current interest and concerns surrounding SWFs - the subject of at least four sessions at the World Economic Forum last week - are understandable, valid and have to be addressed. 'We believe the situation concerning SWFs has changed fundamentally and it's best to bring these issues out into the open to be discussed. The question is how.'

The code of best practices for SWFs that the International Monetary Fund and the World Bank are working on will be a good starting point, he said.

Singapore has offered inputs. It feels that any code for SWFs should not be too prescriptive, but be general, flexible and, to some extent, voluntary, because 'SWFs are not all the same, countries are not the same', said Dr Tan. 'We don't think that a one-size-fits-all code of practice is going to work.'

Whatever guidelines emerge must not disadvantage SWFs, Dr Tan said, noting that there are suggestions to 'copy' the fully transparent model of Norway. But requiring full financial disclosure of SWFs when other vehicles such as hedge funds and private equity funds do not have such obligations 'will not be fair'.

Beyond any code of practice, what is more important is how each SWF conducts itself, he said. In Singapore's view, it is key to clarify the purpose of each SWF's investments and be transparent about its governance.

As for notions about SWFs becoming saviours in today's turbulent financial world, Dr Tan said: 'I should make it clear that when GIC invested in Citigroup and in UBS, we did so because we thought this was a good opportunity which only comes maybe once in two or three decades.

'GIC did not do these investments to bail out the banks or to help stabilise the US financial system, obviously.'


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