SINGAPORE -- Strong performances in major equity markets, backed by an improving global economy, pushed the value of Temasek Holdings' portfolio up 13.6% on the year to 275 billion Singapore dollars ($199 billion) at the end of March, the highest since the Singaporean state investment firm's inception in 1974.
However, the value of new investments made by Temasek for the year ended March plunged by nearly half from the previous year, as the state-owned fund had more difficulty finding investment opportunities with good return prospects. With U.S. interest rates poised to rise, the company is likely to retain its cautious investment approach this year.
These figures were announced in Temasek Review 2017, the fund's annual report, issued on July 11. Total shareholder return for the year, including the dividend paid to its sole shareholder, the Ministry of Finance, was 13.4%.
The strong performance was a turnaround from the previous year's negative 9% return. Temasek is under increasing pressure to create better returns, as a maturing economy and aging population have increased the government's financial burden. A constitutional change has enabled the government to funnel more of the fund's investment returns into the national budget since 2016.
Slow investment year
Despite the better figure, it was a slow year for investment. Temasek invested a total of S$16 billion for the year ended March 2017, down 47% from the previous year and the smallest figure in six years. The company divested some S$18 billion for the year, down 36%. It is the first time since the year ended March 2009 -- the year the global financial crisis erupted -- that Temasek has invested less than it sold off.
"We reduced our pace of investment quite a fair bit," Temasek President Chia Song Hwee told the press conference.
High share prices made the company more cautious about chasing new investment opportunities. Also, the anticipated interest rate hike in the U.S. is weighing on the upside potential. Competition among global investors informed the fund's cautious approach, as global money is going after better returns amid the current environment of low interest rates and excessive liquidity.
The fund's slowing investment was also "driven by [Temasek's] cautious global outlook, and tempered by geopolitical risks across the world," Chairman Lim Boon Heng said in the annual report.
In its search for higher returns, Temasek increased its investment in unlisted assets to 40% of its portfolio, up from 39% for the year ended March 2016 and 33% for the previous year.
In 2011, the fund began shifting its focus to new growth sectors, such as technology, nonbank financial services and life sciences. The effort continues, with assets in the technology and media segment increasing to S$17 billion at the end of March, from S$4 billion in March 2011. New investments made during the year included those in e-commerce giant Amazon.com, Chinese online travel reservation platform Ctrip, Indian life insurer SBI Life and Verily Life Sciences, a life-sciences research organization under Google's parent Alphabet.
Expanded investment in the technology and life-sciences sectors increased Temasek's exposure to the U.S. market. The largest percentage of the new investments in those segments was in the U.S., the report said.
For the total portfolio, North America represented 12% at the end of March, up from 10% a year earlier. Singapore remained the top investment destination, with a 29% exposure, followed by China, at 25%, both unchanged from the previous year. Asia as a whole accounted for 68% of the total.
GIC, another Singaporean sovereign wealth fund, announced on Monday that its 20-year annualized rate of return decreased to 3.7% for the year ended March, down from the previous year's 4%. That metric measures the long-term return over global inflation and is the most meaningful performance benchmark that the fund discloses. Although GIC will only say that its portfolio value is "well over US$100 billion," industry observers estimate the figure tops $300 billion.
On Temasek's outlook, Chairman Lim said, "We expect the more synchronized global growth to continue," and that "we remain hopeful that China, over the medium term, can transition to a more sustainable growth path, though credit risks need to be managed."
He warned, however, of various dangers, including "a potential credit crunch in China, rising geopolitical uncertainties, and increasing global trade protectionism arising from populist politics."
GIC echoed those concerns in its latest annual report. "Valuations remain high across most major asset classes," the report said. "Given the expectation of modest economic growth and earnings, this portends low returns over the next decade. We thus expect real returns for the GIC portfolio to be lower in the coming years."