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EPILOGUE

BOLD

STANDS THE TEST OF TIME

When it began operations, GIC ventured into many unknowns. With boldness and vision, GIC developed operational capabilities, stepped beyond traditional investment markets and enhanced its investment bandwidth to emerge as a global investor. GIC has also navigated the changes in the global financial landscape and crises and continued to fulfil its purpose of securing Singapore financial future.

Raffles City Tower
Lehman Brothers
Today, GIC is a vibrant, distinctive global investment management company critical to Singapore’s financial security. With boldness and vision, it has developed operational capabilities, stepped beyond traditional investment markets and enhanced its investment bandwidth to emerge where it is today. In navigating the changes in the global financial landscape and crises, GIC has demonstrated the ability to adapt and regenerate, which are cornerstones of its achievements.

It has been 40 years since Yong Pung How was handed the Certificate of Incorporation for GIC.

How has GIC developed since? To what extent has it realised the vision, the mission and the ambition that inspired its creation?

This epilogue updates the story of GIC from when it began as a tenant of a single floor of the MAS offices at the old SIA Building. While the narrative is framed chronologically, it is not so much a historical register as a spotlight on the critical decisions that shaped how GIC progressed from a shell of a company to what it is now—a vibrant, distinctive global investment management company critical to Singapore’s financial security.

Part 1

Setting the Foundations

GIC’s inaugural decade was a heady mix of financial market crises and euphoria. The financial market stresses would have unnerved the most seasoned of investors: American interest rates in the high teens, a deep recession in the United States, a sovereign debt crisis and a “Black Monday”, when global stock markets tumbled by as much as 60 per cent. Yet, the decade also ushered in an era of disinflation, falling interest rates and extended bull runs in global stocks and bonds.

The board played a critical role during GIC’s fledging years. It was a steadying influence on policy direction without interfering in GIC’s individual investment decisions, while its guidance would shape GIC’s development. It was a board with an unrivalled heft: of the nine inaugural directors, two were the Prime Minister and Deputy Prime Minister, serving as Chairman and Deputy Chairman respectively, and another four were Cabinet Ministers.

Lee Kuan Yew and Dr Goh Keng Swee provided cardinal leadership. They worked in tandem to give the young company its moorings. From his GIC office, Dr Goh guided management and staff on issues that needed the board’s attention. He resumed his famous “Monday morning prayers”, the weekly briefings on financial markets which became the training ground for young MAS and GIC officers. And, belying his stern exterior, his door was open to officers, both senior and junior.

Lee Kuan Yew was no Honorific Chairman. He studied GIC board papers carefully and would scribble questions on the margins – questions which had to be answered in writing within the day. With his insistent vision and formidable intellect, Lee was a commanding presence. When he stepped in to chair a board meeting, GIC attendees automatically straightened their backs in preparation for their briefings. Lee’s imprint on GIC’s development would be indelible.

From its first meeting, the board set its expectations on three foundational areas, expectations that have defined GIC since.

First, was GIC’s ethos – its value system, the essence of which the board saw as integrity, meritocracy and boldness of vision. Both Dr Goh and Lee repeatedly stressed that these were the preconditions for GIC’s success. In short, GIC had to conduct itself in a manner beyond reproach, be distinguished for its professionalism and excellence, and have inspired leaders to take the company to greater heights. These values have become intrinsic to the GIC psyche. They guide how GIC recruits and develops its people and earmarks its future leaders.

Second, was GIC’s investment orientation: that its focus would be long-term returns, not short-term gains. As Lee put it, quarterly results mattered little to him, “even annual returns need not be concerning unless GIC was acting stupidly. What mattered was whether GIC was investing in long-term assets.”

Critically, too, the board accepted that long-term investing called for a fortitude to ride out short-term losses. Preparedness to see through short-term losses has become one of GIC’s core strengths. It gave management the confidence to weather the financial crises that were forthcoming.

Third, and most fundamental, was GIC’s significance to Singapore’s financial security. At its root, GIC was created to ensure that Singapore was in control of how its reserves were managed and remained master of its destiny. That was why Dr Goh and Lee were insistent that the management of Singapore’s reserves should not be entrusted to external fund managers. GIC would be the locus of where Singapore would develop expertise in reserve management.

The ultimate purpose of GIC, as Lee put it, was “to develop the essential capability of managing our reserves ourselves so that we could better control our long-term destiny.” In turn, if GIC was to fulfil that high purpose, it had to be in charge of its own destiny.

The ultimate purpose of GIC was “to develop the essential capability of managing our reserves ourselves so that we could better control our long-term destiny.”

Two themes, therefore, set the context against which to assess GIC’s evolution. One is GIC’s role in enabling Singapore to be in better control of its destiny. Two is how GIC has stayed on top of the vast changes in the financial landscape to fulfil its mission and mandate.

Cutting the umbilical cord

GIC witnessed quantum organizational advances during J Y Pillay’s tenure as Managing Director. A maestro in organizational development – he was the pioneering Chairman of Singapore Airlines – Pillay worked his craft on GIC.

Pillay weaned GIC from MAS. Up till then, GIC had piggy-backed on MAS for office space, corporate services, management of its bonds’ portfolio and economic analysis. Observers would not have been faulted for treating GIC as an appendage of MAS.

In 1987, Pillay moved GIC to Raffles City Tower, a relocation he termed as “cutting the umbilical cord” from its putative corporate womb. It compelled GIC to become an autonomous, self-sufficient investment entity in double quick time. The stage was set for it to forge its own identity.

Pillay moved GIC to Raffles City Towers, a relocation he termed as “cutting the umbilical cord” from its putative corporate womb. It compelled GIC to become an autonomous, self-sufficient investment entity in double quick time.”

Pillay jump-started talent development in GIC. GIC’s department heads were expatriates when he assumed office, a situation at odds with the vision that GIC’s destiny should be in the hands of Singaporeans. Local managers were then groomed to take over leadership positions. When Pillay left GIC, a Singaporean top management team was in place. That team would lead GIC for up to the next two decades. Pillay also launched an intensive effort to recruit and train staff to meet GIC’s expanding needs. So successful was this effort that GIC’s hires soon became the favourite targets of headhunters!

Pillay also put in place a structured investment process. The process itself was not original – it was standard practice among US institutional investors. However, he provided the leadership to prime the board to the new approach and to have the framework implemented. GIC now had an investment process that addressed, systematically, the whole range of decisions, from long-term asset allocation to the selection of individual securities.

Another milestone during Pillay’s tenure was the inception of a performance measurement system. With the aid of a British boutique firm, the system was built from scratch, as it had to capture and measure the whole gamut of factors impacting GIC’s investment performance. To boot, performance reports had to be timely.

GIC’s stakeholders were now able to know how well – or otherwise – every investment decision in GIC was doing.

Towards the end of the GIC’s first decade, its officers endured a “baptism of fire” sparked by a “Black Monday”, when global stock markets fell by as much as 60 per cent. The falls raised fears of an impending global recession. The outcome for GIC, however, was encouraging. Its diversified portfolio weathered the crisis while the management team Pillay had put in place provided the leadership to calm nerves.

Reporting to the board, Pillay commented that GIC’s responses had been reassuring, noting that “there was a good chance of GIC living up to its billing as genuine, unflappable investors with a durable view.”

It was also testament to GIC’s growing maturity as an investment management company.

Out of the Comfort Zone

In the 1990s, GIC ventured beyond its accustomed investment terrain. It became more globalised and an early institutional investor in Asian emerging markets. GIC also enhanced its private equity and real estate capabilities. These advances reflected a vision of the global changes to come and the boldness to adopt new ways to invest in unfamiliar investment situations.

The changes engineered were against the backdrop of two developments that Lee had highlighted to GIC as having “seismic implications.” One was the profound changes in Europe: the dissolution of the USSR and the end of communist regimes in Eastern Europe; the fall of the Berlin Wall and the re-unification of Germany; and, the formation of the European Union linked through a common currency, the Euro. Lee counselled that GIC be positioned to exploit the consequent investment opportunities in the continent.

Second was the unprecedented transformations in Asia, particularly in China. There, the reforms that Deng Xiaoping had introduced in the late 1970s and 1980s had taken root, and Dr Goh and Lee posited that China was poised to be one of the leading economies in the world. As we know now, their prognostications on China and the investment opportunities there were spot-on. Elsewhere, India, too, was beginning to liberalise. Indeed, the region seemed set to have higher growth rates compared to others.

A strategic move into Asia and Europe would be a major shift for GIC. At the beginning of the 1990s, GIC’s portfolio was distinctly Anglo-Saxon in orientation: all its private equity and real estate, and about two-thirds of its public market investments, were in the US and the UK.

When it came to Asia, GIC’s investments were mostly in Japan. GIC’s low exposure to the other regional markets was mainly because, except for Hong Kong and Malaysia, they were illiquid, undeveloped and lacked clear governance standards. GIC was restricted from investing in Singapore.

But Lee intuited that GIC’s predisposition to Anglo-Saxon markets also reflected a cultural and language affinity: “Because of Singapore’s history and cultural involvement with Britain and the US”, he observed “Singapore would naturally operate, by and large, with the Anglo-Saxon economies. The language barrier and cultural bias made it difficult for GIC to be more than a marginal player in countries like Japan and Germany.”

At another board meeting, Lee noted that though GIC recognised that East Asia would enjoy high rates of growth, “it should do more to position itself to react to this fundamental change. GIC should not let language and cultural bias skew its strategic thinking.”

GIC acted to remedy this cultural blind spot. It moved out of its comfort zone.

Lee Ek Tieng, who succeeded J Y Pillay in 1989, oversaw GIC’s investment shift towards Asia. He moved the management teams of Real Estate and Special Investments from Redwood City, which was close to San Francisco, back to Singapore. Their Asian teams were also expanded.

GIC then embarked on a five-year plan to raise its Asian investments by allocating more of its funds to the region, while still invested in Europe and the US. The new investments would be mainly in the equity markets, which were generally more liquid than the private markets. But GIC also planned to raise its real estate and special investments, particularly in countries like China where the equities markets were small.

Under Teh Kok Peng, who led the private markets group, Special Investments became a force in Asian private equity. The team’s chief hurdle was the scarcity of attractive investment opportunities of size. Most of the promising, unlisted Asian companies were family-owned, with the owner families generally loath to relinquish control.

GIC, therefore, could not confine its efforts to recognisable names or sectors. It had to scour far and wide. In China, the early deals included investments in firms manufacturing batteries, toilet bowls and washing machines. GIC’s practice of co-investing with partners, usually experts in the industries concerned, helped.

Teh recruited Seek Ngee Huat to run Real Estate. His team’s first major Asian investment, with a Japanese group, was securing a prized Tokyo site and developing the Shiodome City Centre on it. The team would eventually acquire properties in other major Asian cities.

The Asian Financial Crisis (AFC), which erupted in 1997, did not shake the board’s conviction in Asia. Lee saw the crisis as an opportunity for GIC to “make good strategic purchases, not just a quick profit.” He also suggested that the board co-opt industry leaders who had regional experience. Subsequently, Peter Seah, then-CEO, Overseas Union Bank (OUB); Ang Kong Hua, then-CEO, National Steel; and Ho Kwon Ping, Chairman, Wah Chang International Corporation and Banyan Tree Hotels and Resorts, were appointed to the board.

A milestone for Real Estate and Special Investments was their corporatisation as GIC Real Estate Pte Ltd (GIC RE) and GIC Special Investments Pte Ltd (GIC SI) respectively. By the late 1990s both were competing against the best in their fields. Lee Ek Tieng had assessed that corporatisation would then give them the organizational autonomy to develop the culture, business practices and personnel policies. GIC’s largest investment group, Public Markets, would be incorporated later.

The advances in the 1990s laid the foundations for GIC to become what it is now, a global sovereign wealth fund (SWF) with multi-asset capabilities. The vision that GIC should invest beyond its traditional markets led to new sources of returns and diversification. GIC’s early pivot into emerging Asia, especially China, gave it a head start in a fast-growing area. The corporatisation of Real Estate and Special Investments catalysed their development into investment entities of world-class standing.

Not just a rainy day fund manager

In 2002, the Board commissioned a review of GIC’s investment policy and strategy. While the review led to important changes to GIC’s investment framework, the more momentous outcome was a follow-up initiative led by MOF. The initiative resulted in a transformative view of the role of the reserves, changes to GIC’s investment policy and a Constitutional Amendment that cemented the link between the reserves and the welfare of Singaporeans.

In approving the review, Lee noted that its purpose “was not because the growth and achievement of GIC was in doubt. It was because there were fundamental changes going on and nobody could be sure what would happen in the future.”

Lee was referring to developments such as the bursting of the dot-com bubble, the 9/11 terrorist attacks in the US, the prospect then of the US invading Iraq, the prolonged stagnation of the Japanese economy and the difficult structural changes that Europe was undergoing. “It was necessary”, he added “to find the right navigator with good maps in order to steer through the treacherous waters.”

A consulting firm, Cambridge Associates, was engaged. It was chosen chiefly because of its expertise on the investment policies and practices of large US university endowments. The firm’s director of research, Ian Kennedy, led the assignment. He was given a wide ambit, with access to board members, including Lee.

Kennedy was asked to start from first principles, beginning with the very purpose of the assets managed by GIC. As it turned out, Kennedy’s conclusion on this would be refined further by a more fundamental review later. Even so, his conclusion was deftly put – that the assets managed by GIC were long-term savings to “provide for the future support of the Republic of Singapore and its citizens.” GIC’s financial objective could, therefore, be defined as “preserving and enhancing the fund’s inflation-adjusted purchasing power over the long term”.

The assets managed by GIC were longterm savings to “provide for the future support of the Republic of Singapore and its citizens”. GIC’s financial objective could therefore be defined as “preserving and enhancing the fund’s inflation-adjusted purchasing power over the long term”.

Kennedy also recommended an asset allocation policy suitable for GIC’s financial objectives, using US university endowment funds as a reference. Lee, however, qualified the extent to which these funds could serve as a model for GIC. They, he pointed out, “did not need to take into account what happened to the US economy”. GIC, however, “had to take into account the potential calls on its funds if the Singapore economy suffered a serious downturn.

As Lee saw it, GIC was more than a fund manager for Singapore. The reserves it was managing were Singapore’s lifeline in a crisis.

Not all of Kennedy’s asset allocation recommendations would be accepted. However, an asset class he recommended has remained a staple for GIC. This was inflation-indexed bonds. These are sovereign bonds whose principal and coupon payments are adjusted for inflation, thus protecting the investor from inflation risk. As such, they directly address GIC’s mission. The drawback, though, was the limited supply of such bonds.

The board also accepted Kennedy’s recommendation for a board-level Investment Committee. It would enable board oversight over GIC’s investment policy to be more exhaustive. The inaugural committee comprised Dr Richard Hu, S Dhanabalan, Peter Seah and Lim Siong Guan, then Permanent Secretary at the Ministry of Finance (MOF) and Head of the Civil Service. Lee Hsien Loong agreed to chair the Investment Committee “to kick it off”, but proposed that Dr Tony Tan should assume the chairmanship in due course.

Later, the committee inducted Charles Ellis and Robert Litterman as members. Ellis was a recognised name in investment circles and was then chairing the Yale Endowment Investment Committee. Litterman was an acknowledged Wall Street expert on risk management.

At its third meeting, the Investment Committee probed a critical issue: how much risk could GIC bear? The discussion led to a project that would have profound repercussions not only for GIC, but also for the role of reserves for Singapore. The catalyst was Lee Hsien Loong's observation that there was long-standing ambiguity about the nature and purpose of the reserves managed by GIC. Essentially, the inconsistency reflected, as he called it, “two opposite philosophies”.

On the one hand, GIC’s mandate was to invest for long-term returns, the corollary of which was that short-term losses would be tolerated. This viewpoint had an implicit assumption that GIC-managed reserves would not be called on at short notice by the Government. However, if these reserves were “rainy day” funds, then a contrary philosophy should apply – that to be available for contingencies, they should be invested in more liquid, less volatile, lower-return assets.

This inconsistency had to be resolved.

MOF assembled a task force to tackle the issue. Led by Ravi Menon, then its Deputy Secretary and later to be MAS Managing Director, the team also included GIC and MAS staff. What followed was a prodigious, painstaking effort to review Singapore’s public finances.

The study arrived at a seminal conclusion: the reserves managed by GIC could be viewed as more than a contingency fund; it was also a financial endowment for Singapore. This was a perspective that signified, as Prime Minister Lee Hsien Loong put it, a “transformation of the concept and role of reserves”.

Two notable implications followed. The first concerned GIC’s Policy Portfolio, or asset allocation policy. MOF concluded that as GIC was managing endowment assets, its portfolio had less need for liquidity. GIC could instead allocate more to assets with greater short-term volatility but better long-term returns. It, in short, could adopt an asset allocation strategy that embodied a higher risk tolerance.

MOF’s conclusion would initiate a distinct change in GIC’s asset allocation strategy. Up to the end of the 1990s, GIC’s asset allocation was 30 per cent cash, 40 per cent bonds, 30 per cent equities – a decidedly conservative posture as compared to US endowment and pension funds. GIC would now reduce its strategic allocation to bonds and cash from about two-thirds to one-third and correspondingly increase the allocations to public equities, real estate, private equity and infrastructure.

The endowment concept would find expression in a Constitutional Amendment in 2008. The amendment set the framework for how investment returns could be tapped to supplement the Government’s fiscal spending. The underlying intent was for a Spending Rule viable and fair to both present and future generations of Singaporeans. Under the Amendment, the Government could use up to 50 per cent of the expected long-term real rate of return of the net assets managed by GIC and MAS.

It was a significant change from the Net Investment Income framework, under which the government could only spend from actual investment income, comprising dividends and interest. The new Net Investment Return (NIR) framework, implemented in 2009, in contrast, allows the government to spend based on expected long-term returns, including both realised and unrealised capital gains. Temasek was later included in the NIR framework in 2016.

The new Net Investment Return Contribution framework implemented in 2009 allows the government to spend based on expected longterm returns, including both realised and unrealised capital gains.
The decisions described in this section are among the most momentous for reserve management. The conclusion that the reserves were also endowment assets was path-breaking. Lee Kuan Yew’s comment that GIC’s funds could be called on to aid a seriously troubled Singapore economy rings true now, as it did then. At the same time, GIC’s good performance is critical if Singapore is to benefit from the endowment which the reserves represent. In short, GIC is more than a rainy day fund manager – it is one that provides regular income to Singapore for the country to grow well.
Part 2

Into the Storm

The Global Financial Crisis of 2007-2008 shook the international financial system to its roots. It brought down banks, including the storied Lehman Brothers, and caused financial giants like Bear Stearns and Merrill Lynch to be disposed of at fire sale valuations. Global stocks fell by as much as 60 per cent. Long-term investors such as pension funds, university endowment funds and SWFs took heavy portfolio losses. Some had to veer from their investment policies and others had to liquidate portions of their portfolios to raise cash.

To what extent did the GFC compromise GIC’s mission and its control over its investment strategy? What were the lessons for GIC?

To what extent did the Global Financial Crisis compromise GIC’s mission and its control over its investment strategy?

Two policy decisions mitigated the crisis’ impact on GIC. First, management had in fact become cautious about global stock markets prior to the crisis, though it had not foreseen its severity. In July 2007, warning of the risk of a “severe financial market dislocation”, GIC reduced the policy allocation for equities. The timing was fortuitous as stock markets peaked in October 2007. Early in 2008, GIC further reduced equities. These moves enabled GIC to avoid a greater loss in the ensuing bear market.

Second, GIC had avoided investing in structured credit products like collateralized debt obligations (CDOs) that caused investment banks and investors to lose staggering amounts of money. Before the crisis, CDOs were moneymaking machines for these same parties. GIC had felt that, their triple-A ratings notwithstanding, CDOs were too opaque to invest in.

Some of the cash that GIC had raised from selling equities was later invested in two highly publicised investments – the shares of Citigroup and UBS, the transactions completed in January and February 2008 respectively. Both banks were viewed as having strong global franchises: UBS in global wealth management and Citigroup in consumer and corporate banking. However, as the crisis unfolded, financial institutions, including UBS and Citigroup, disclosed more problematic assets on their books.

On hindsight, the investments in the two banks, particularly UBS, were too early. Financial markets fell sharply in late 2008 and governments then had to deploy massive funds to bail out their banks. While the Citigroup investment soon after turned positive, the investment in UBS did not.

The impact of the investments in these two banks on GIC’s performance, or indeed of any specific investment such as the highly successful investment into Global Logistics Properties, has however to be put in perspective. First, GIC’s investment performance should be assessed not just on the basis of individual investments, but on the total portfolio over the long term.

Also, GIC’s investment process matters. The process comprises a “hierarchy” of decisions, the most important of which is GIC’s asset allocation strategy. It accounts for the bulk of GIC’s returns. In other words, the pre-emptive sale of equities, an asset allocation decision, had a greater impact on aggregate performance than specific investments.

Nevertheless, the GFC hurt GIC’s investment returns. The Report on the Management of the Government’s Portfolio (“GIC Report”) for FY2008/09, which covered the 12 months to March 2009, disclosed that its portfolio had suffered a loss of more than 20 per cent in Singapore dollar terms over that period.

Leading institutional investors also experienced losses of a similar magnitude.

The pervasiveness of such severe losses can be attributed to two factors. First, global equity markets fell by about 55 per cent from peak to trough during the crisis. Virtually every stock sector was adversely affected.

Although it had cut back on equities before the market crash, GIC had retained a core portfolio of equities through the crisis. A tenet of long-term investing is that historically, equity markets of functioning economies do eventually recover, and that investors should stay invested to benefit from the eventual recovery. Nevertheless, the fall in the marked-to-market value of GIC’s core equity holdings was significant.

The second distinctive feature of the GFC was that, except for sovereign bonds and gold, other asset classes like private equity, real estate, infrastructure, commodities and corporate bonds fell in tandem with global equities. This phenomenon confounded expectations that a diversified portfolio would mitigate risks. As the Yale Endowment Fund noted, “diversification failed to protect asset values”, while the GIC Report for FY 2008/09 noted that all the asset classes it invested in – except for cash, gold and sovereign bonds – fell during the crisis.

The GFC stressed pension, endowment and sovereign wealth funds in different ways. Portfolio losses caused some pension funds to be under-funded by as much as 30 per cent at the end of 2009. Several SWFs had to liquidate their assets to provide funds to stabilise their economies. Some US university endowment funds also had to sell into falling markets to raise cash for their university sponsors.

In contrast, other institutional investors were able to withstand the marked-to-market losses incurred during the GFC and adhere to their investment policies. GIC was among them.

Other institutional investors were able to withstand the market-to-market losses incurred during the GFC and adhere to their investment policies. GIC was among them.

As a result, GIC’s policy allocations to asset classes were not cut indiscriminately. Considered strategic, they were maintained, eventually benefitting from the market recovery. The GIC Report for FY 2010/11 disclosed that the average annual five-year nominal returns in US dollar terms for the GIC portfolio was 6.3 per cent. This period included the worst of the fall in asset prices during the GFC. For the same five-year period, the portfolio’s 20-year rate of return, in excess of global inflation, was 3.9 per cent.

GIC’s portfolio had therefore recouped the losses sustained during the GFC. GIC had not just kept its capital intact, but had increased it. The key was that it was not pressured by market events to abandon its investment strategy. It remained in control of its fate. Hence, it did not falter in its mission during a crisis that was its most severe test yet.

Underscoring GIC’s resilience during the GFC was the board’s commitment to the long-term perspective, to the dictum that as a long-term investor, GIC had to be prepared to bear short-term losses. Tharman Shanmugaratnam, then-Minister for Finance, articulated these sentiments thus: “Because we are long-term investors, we have to be prepared to lose money over the short term, in a crisis or even over a cycle. Because if you are not prepared to lose money over the short term, then you are taking too conservative an investment approach, which will not yield adequate returns for the long term.” The board’s resolute endorsement gave management the support they needed to adhere to its long-term asset allocation.

Critically, too, the impact on GIC’s portfolio during the GFC did not breach its risk tolerance parameters. The severity of the crisis was indeed an eye-opener. Those with losses exceeding their risk tolerance had to cut their positions. GIC, however, kept within its risk limits. The GFC illustrated the importance of having stress limits that were clear and acceptable to stakeholders.

There were other lessons from the GFC. Portfolio diversification, as practised by GIC and other institutional investors, had not worked as well as expected. In addition, headline or reputational risk had to be considered for high-profile or large investments. These investments may not have a significant impact on total portfolio performance but can distract management. GIC would take in these lessons when it re-shaped its investment framework.

In Time for The Future

“In time for the future” is Lim Siong Guan’s credo: that GIC be prepared for the future by anticipating challenges and then rejuvenating itself to surmount them, while staying true to its core values. It was an ambition singularly apt for the times, as the GFC had set in motion concerning developments that boded a challenging financial landscape.

The verve and purpose Lim brought to his mission would define his tenure as Group President when he succeeded Lee Ek Tieng. It enabled transformative changes for GIC, namely a re-crafting of its investment framework and a corporate makeover.

GIC had three objectives in mind when re-shaping its investment framework: to internalise the key lessons surfaced by the GFC into its investment process; to ensure a resilient portfolio in a challenging post-GFC investment environment; and to better integrate its public and private markets expertise. Designing a framework that could accommodate the three objectives holistically called for vision and bold thinking. It meant a re-write of an investment framework that, in essence, GIC had used for many years.

The team assigned to the task was given extensive latitude to redraw GIC’s investment architecture. It trawled widely for ideas, including from investment practitioners globally. The board and the client were also intensively engaged. Leslie Teo, then-Chief Economist, recalled the “several extended interactive sessions with Tharman Shanmugaratnam and discussions with board advisors Robert Litterman and Martin Leibowitz.” In fact, as the project neared its end, the full board and advisory team, including PM Lee Hsien Loong, devoted a day at the GIC Offices at Capital Tower, subjecting the proposals to scrutiny.

The 15-month long process culminated with the inception of the New Investment Framework (NIF) on 1 April 2013. The essence of the NIF is conveyed through its three Portfolios: the Reference Portfolio, the Policy Portfolio and the Active Portfolio. Each addresses a critical component of GIC’s investment process.

The Reference Portfolio is an addition to GIC’s investment framework. A notional portfolio comprising global equity and global bond indices, it is a reference for the quantum of risk that GIC’s client, the Government, is prepared for GIC to take. The GFC had shown that clarity about the Client’s risk tolerance was crucial in times of severe market stress. After considering several portfolio mixes that GIC had stressed-tested, the Ministry of Finance (MOF), on behalf of the Government, chose a Reference Portfolio comprising 65 per cent equities, 35 per cent bonds, as expressing its risk tolerance.

The Ministry of Finance, on behalf of the government, chose a Reference Portfolio comprising 65% equities, 35% bonds, as expressing its risk tolerance.

GIC elected to use a Reference Portfolio, instead of standard statistical measures, to convey risk, as it is a more tangible depiction of market upheavals. Thus, over the last 50 years, a 65:35 portfolio would have declined by 20 to 30 per cent over a three-year rolling period in times of severe market stress, such as the tech bubble burst and the GFC. These declines, however, were not permanent. The MOF assessed that the combination was associated with a portfolio stress it considered tolerable and that yielded reasonable long-term inflation-adjusted returns.

GIC’s mandate is to generate good real returns over the long term whilst keeping to the risk limits set by the Reference Portfolio.

The next two Portfolios are what GIC invests in to achieve its mandate. First, the Policy Portfolio is GIC’s asset allocation policy. It is the heart of the NIF, as it is the investment decision that accounts for the bulk of GIC’s long-term returns and risk exposure. That decision generates “beta” or returns which accrue by reaping the risk premia of selected asset classes over the long term. For GIC, “long-term” means a time span of 20 years, a span which covers several business cycles and market peaks and troughs.

GIC chose six asset classes for the Policy Portfolio: Developed Market Equities, Emerging Market Equities, Nominal Bonds and Cash, Inflation-linked Bonds, Private Equity and Real Estate. It is an asset mix tuned to GIC’s mandate of preserving and enhancing the reserves as it allows for both the growth and safety of the portfolio. Thus, public and private equity play the enhancing role, nominal and inflation-linked bonds the defensive and real estate is an inflation hedge.

GIC assessed that the six asset classes were sufficient for robust portfolio diversification. It had stress-tested and qualitatively assessed different combinations of the six against a range of scenarios. The portfolio mix finally selected could be expected to yield good real returns over time and be resilient in adverse market situations. Such a portfolio would not do as well as an equity-heavy portfolio in bull markets. By the same token, it would not fall as much in bear markets. More importantly, it offered a good chance that its performance, when averaged over different market cycles, would meet the Client’s investment objectives.

Given its significance, the Policy Portfolio is decided by the board, after considering management’s recommendations. It is a long-term decision, although GIC has some latitude to deviate from it in expectation of large market movements. GIC used that flexibility during the GFC. It would prove its defensive worth when COVID-19 broke.

The Active Portfolio comprises skill-based, discretionary investment strategies by investment professionals. These strategies aim to create “alpha”, returns above what the Policy Portfolio can generate. In short, alpha raises the prospects of GIC achieving its mandate. Management is accountable for the performance of the Active Portfolio.

While alpha investments had been in place before, the NIF modified their operating rules to improve governance, risk management and cross-asset collaboration. Firstly, every active investment strategy has to exceed a cost-of-capital, market-based hurdle. Secondly, active strategies will not raise GIC’s overall risk. In fact, additional risk management controls have been inserted. This includes the setting up of an Investment Board, which comprises private sector experts, to oversee the Active Portfolio risk limits. Thirdly, the Active Portfolio explicitly creates opportunities for different asset groups to collaborate on investments spanning different asset classes.

While alpha investments had been in place before, the NIF has modified their operating rules to improve governance, risk management and cross-asset collaboration.

Critically, the NIF was a model for the future in two ways. First, the clarity it brought to bear on key areas like governance, risk management, portfolio diversification, sources of returns and risk would be fundamental to GIC’s resilience in the global Covid-19 crisis in 2020. Secondly, the NIF brought GIC closer to a “OneGIC” mode, where its multi-asset capabilities could be harnessed in a coordinated fashion. This opened new investment vistas for GIC, a development that would be increasingly important in the future.

Concurrent corporate changes in GIC reinforced the NIF’s intent to advance a OneGIC investment approach.

These changes were the result of a corporate rejuvenation initiative. It was mooted by Dr Tony Tan when he was appointed GIC’s Executive Director and followed through by Lim Siong Guan. While Lim introduced initiatives covering virtually every aspect of GIC’s operation, the three most critical areas for him were culture and values, organisational realignment and leadership succession.

Culture and values were foremost for Lim. An early outcome then was a refresh of the company’s ethos using the acronym PRIME: prudence, respect, integrity, merit and excellence. These were values intrinsic to GIC from day one. But they were reaffirmed, refreshed, and reinforced. Personnel policies were re-crafted to emphasise and promote behaviour and performance that exemplified PRIME.

Seemingly remote from the world of finance, PRIME however is the underpinning, the bedrock, for strong corporate governance, good performance and organizational resilience. Externally, the standards of integrity and competence that PRIME extols are fundamental to earning the trust of GIC’s partners and counterparties. That trust would be important as GIC, as we shall see later, seeks to develop a network of business partnerships.

Another of Lim’s priorities was organizational re-alignment towards a OneGIC business model. Since their corporatisation, GIC’s three investment arms had become world-class investment entities in their fields. However, the changing investment landscape warranted a more collaborative culture among them for the benefit of the GIC portfolio as a whole. A “one-firm” approach would allow GIC to harness its multi-asset expertise to widen its investment reach and improve its performance. This philosophy was reflected as well in the design of the NIF.

The OneGIC orientation sparked corporate-wide adjustments. Investing groups came together. Mid- and back-office operations were re-organised to cater to more complex, cross-asset investments. Personnel and talent management policies were realigned.

Lim’s third priority was leadership renewal at all levels, of which the most notable concerned GIC’s top leadership. Senior management succession was implemented in phases, culminating with Lim Chow Kiat succeeding Lim Siong Guan as CEO on 1 January 2017. The smooth change of leadership attested to the foundations laid by the previous leaders. They included GIC pioneers, Ng Kok Song and Teh Kok Peng, as well as Quah Wee Ghee and Seek Ngee Huat.

The board also saw changes as GIC was re-inventing itself. Lee Kuan Yew stepped down as Chairman in June 2011. His influence on GIC was foundational: he defined its core values and shaped its strategic orientation. His chairmanship signalled the national significance of GIC’s mission, as did the subsequent board appointments. Lee Hsien Loong, the Prime Minister, assumed the Chairmanship. Teo Chee Hean, then-Deputy Prime Minister, was appointed to the board, joining Tharman Shanmugaratnam, then the other Deputy Prime Minister as well as Minister for Finance.

It was an intense phase for GIC, remarkable for the sweep of changes accomplished: leadership rejuvenation; a value system refreshed to guide and inspire; a reshaped investment framework that reassures stakeholders with clear governance and risk management measures while expanding the scope of active investments; and a realignment to a more collaborative culture to realise the potential of GIC’s multi-asset capabilities. These changes would fortify GIC for the global crisis soon to come.

Prepare, Not Predict

COVID-19, even as it continues to unfold in 2021, has been the biggest test yet of GIC’s functional resilience in a global crisis. When it first reared its head in 2020, it put GIC’s portfolio to unusual market stress and had the potential to disrupt its global operations. The precept “Prepare, Not Predict” enabled GIC to surmount these challenges.

COVID-19 put GIC’s portfolio to unusual market stress and had the potential to disrupt its global operations.

Concerned about the disconnect between rosy financial markets and worrisome market and geopolitical developments, GIC had, before the pandemic outbreak, gone on the defensive, leaning towards preservation over enhancement of assets. Its priority was avoiding significant and permanent portfolio impairment. The portfolio had been stress-tested and prepared for a range of contingencies. Importantly, for several years already, GIC had de-risked its portfolio by reducing its allocation to developed market equities in favour of cash.

GIC’s defensive stance cushioned its portfolio from the worst of the market volatility. This was in early 2020, when global equity markets fell by more than 20 per cent – the steepest quarterly decline since the GFC. Portfolio diversification also kept the portfolio “in good shape”. Notably, the portfolio was less volatile than its risk reference, the Reference Portfolio. In fact, it had been consistently so since GIC had turned defensive. Despite the lower-risk posture, GIC still generated creditable long-term real returns through this period.

“Be prepared” was also how GIC’s operations remained functional as the pandemic spread. A major reason was the regular, meticulous Business Continuity rehearsals to stress-test GIC’s operations for crisis events. These are full-fledged drills where up to half the staff work off-site to test back-up systems and to operate under various crisis scenarios. When COVID-19 emerged, GIC could swiftly roll out measures to protect the health and safety of its staff and to keep its global operations running.

GIC’s operational resilience was also due to continuous upgrading of its technological capabilities. These enabled the quick roll out of large-scale work-from-home processes which proved invaluable when lockdowns swept through GIC’s global offices. GIC’s global operations hence were neither significantly curtailed, nor did investment activity slow. In fact, “GIC has done more deals than before the pandemic.”

COVID-19 did not hinder GIC from pressing on with a shift in its alpha strategy, started a few years earlier. The shift can partly be traced to the inception of the NIF, which opened the doors for cross-asset investments. A more forceful reason was a crowded, competitive field for alpha because of the influx over the years of mega funds, pension funds and SWFs, especially against a backdrop of an investing environment that features low returns. This meant keen competition and stretched valuations for a limited supply of attractive investment opportunities.

In response, GIC re-shaped its alpha strategy, migrating from conventional, standard ways of alpha investing towards a more idiosyncratic and entrepreneurial approach. It meant proactively unearthing investment opportunities, a drive “to go out there and look for the assets, and if possible, to create assets ourselves rather than wait for the fund managers or the bankers to come to us. That’s not the winning formula.” The fresh strategy sees GIC investing through the whole value chain underlying the different stages of corporate growth. It also envisages GIC transforming itself from a passive investor into an active partner contributing to the growth of its investee companies.

While bold and demanding, the idiosyncratic approach levers GIC’s capabilities and strengths. These include its long-term orientation, multi-asset expertise in public and private markets and the ability to provide “flexible capital”. In short, GIC is able to invest across public and private markets, at all stages of a company’s life cycle, and in different capital structures, from private credit to bespoke financing solutions. All these mean a larger universe of niche opportunities for GIC to invest in.

GIC’s more involved, proactive investment stance also leveraged its global network of contacts and partners. The network includes investors, fund managers, investee companies, fund sponsors, thought leaders, business leaders, family offices and industry trailblazers. It is a network developed over the years. As an early non-US institutional investor in Silicon Valley, GIC established relationships with private equity funds that have now become industry giants. Similarly, in Asia, GIC had a headstart in forging relationships with the investment community there. This has helped GIC to be a leading institutional investor in Asia as well as a reason for non-Asian investors to partner GIC for their Asian ventures.

GIC continues to work hard to enhance its network. A signature initiative is the exclusive conferences and forums organised in financial centres around the globe for the investment community. Milestones for GIC’s overseas offices are also occasions for gathering GIC’s partners in that geography. The extensive global network GIC has assembled is an invaluable “calling card” to open doors to potential investee companies. Through this, GIC has been able to offer them advice or connect them to the right expertise to aid their growth.

The mindset of being prepared sees GIC embarking on a visioning exercise to be ready for a low-returns future that augurs to be the most challenging for GIC. While not prompted by the pandemic, Lim CK knew that GIC needed to prepare itself for a global economy beset by fault lines that have been accentuated by this crisis and importantly, navigate implications of a trend reversal in interest rates that will represent headwinds for financial assets.

GIC embarked on an endeavour to envision the investment landscape in 2035 and craft an appropriate long-term strategy. While the process will have intermediate targets, the 15-year time frame will give “our people freedom to be more radical, more courageous as they will not be constrained by the here and now.”

Even as the pandemic continues, GIC has embarked on “GIC 2035”, an endeavour driven by a vision to be the preeminent fund among its peers.

There are several strategies at play, including a clear focus on new alpha opportunities and to acquire deeper expertise in selected areas. Another effort will be to improve GIC’s capabilities to invest in “mega trends, in long-term themes such as the transition to a sustainable world”. GIC will also delve into how its investment decisions can be sharpened through better use of technologies. Culture and Talent will be key areas worked on as GIC looks to expand the scope and power of the existing “OneGIC” model. While the PRIME values will be its bedrock, GIC’s culture looks to nurture a more dynamic, entrepreneurial approach.

GIC is re-generating itself once more.

Bold Vision

Within a space of about 10 years, the Government had need to draw on the reserves to respond to two global crises, the GFC and COVID-19. Both instances attest to the power of the vision that has shaped the course of reserve management in Singapore – that the reserves enable Singapore to better take charge of its own destiny.

In the GFC, the reserves supported two initiatives. The first, in the context of global banks facing heavy withdrawals, was a Singapore Government guarantee on deposits with banks in Singapore. The President’s concurrence was sought and given to use past reserves to back the guarantee. In any event, the undertaking was not triggered. The soundness of Singapore banks and the Government’s undertaking were assurance enough. The episode, though, affirmed Singapore’s standing as an international financial centre.

The second GFC initiative was a “Resilience Package” to protect jobs and help businesses. It was the first time the Government had drawn on past reserves. The President’s approval was sought, and granted, for a drawdown of S$4.9 billion. The actual amount drawn was S$4.0 billion, and in 2011, the Government put back this amount drawn from past reserves.

As for COVID-19, the draw on past reserves has dwarfed the GFC’s. In 2020 and 2021, the Government announced Budget assistance packages of over S$100 billion. Altogether, the expected draw on past reserves over the two financial years will come up to a total of S$53.7 billion. This is ten times more than that for the GFC and is equivalent to over 20 years of accumulated budget surpluses.

When delivering the 2021 Budget Statement, Deputy Prime Minister and Minster for Finance, Heng Swee Keat, reminded Singaporeans: “We are extremely fortunate to be able to tap our strategic assets and deploy the resources required to deal decisively with Covid-19 and the considerable uncertainties that lie ahead. We should never take our reserves for granted.”

The GFC, and particularly COVID-19, concretely illustrate the role of reserves as a “rainy day” fund – as well as how fast reserves can be drained during a global crisis. COVID-19 will not be the last crisis that Singapore will face. The ability to deploy reserves promptly and in meaningful measure to meet contingencies is of immense strategic value for a small, resource-scarce country.

The GFC and particularly COVID-19 concretely illustrate the role of reserves as a “rainy day” fund, as well as how fast reserves can be drained during a global crisis.

At the same time, the country’s reserves are also an endowment fund. Indeed, the role of the reserves as endowment assets is expected to grow over time. This is due to rising public spending on societal needs, reflecting an ageing society and to provide stronger social safety nets; investments to upgrade physical and human capital to support economic growth; and responses to challenges such as climate change. GIC’s contribution to the Government’s annual fiscal spending will hence be even more important.

The dual functions of the reserves resonate with the wording of GIC’s mission statement: “to preserve and enhance the long-term international purchasing power of the reserves it manages.”

The trade-off of the “two philosophies” highlighted by Lee Hsien Loong has become more challenging for reasons touched on earlier. On the one hand, rising fiscal spending means greater reliance on the reserves to supplement the budget. On the other hand, a more uncertain investment environment implies higher portfolio volatility than before. This calls for caution.

In managing the trade-off, GIC has eschewed the soft option of citing a future difficult investment landscape as reason for a conservative investment stance and accepting the consequent paltry returns. Instead, it sees a responsibility to its stakeholders to step up to the plate, to extract as much returns as it can whilst keeping to its risk constraints. The strategy refresh it started embodies that determination.

The endeavour will be arduous. It calls for GIC to be in control of its fate so that it can achieve its mission. What would it take for GIC to keep faith with that vision?

Lee Kuan Yew offers counsel that reminds, enlightens, inspires. In what would be his valedictory address as GIC Chairman, Lee reprised the keys to GIC’s success, keys which are pertinent in these uncertain times. The essence is for GIC to remain true to its core values.

• First, it must adhere scrupulously to the tenet of meritocracy and excellence: hire, develop and retain the best talent. The quality of its people would remain “the primary foundation for future success”, Lee emphasised.

Lee’s injunction on people quality is ingrained in GIC, beginning with the recruitment of its pioneer staff by Yong Pung How, GIC’s first Managing Director. Since then, talent management has become more complex and demanding, but remains as critical. The success of GIC will depend on GIC’s ability to recruit quality and global expertise to support the drive into more complex alpha investments.

Succession planning is another closely watched area for GIC. A systematic process identifies staff with potential to lead critical positions in five- and ten-years’ time and their progress is closely watched by management and a board committee. The objective “is to get a better gene pool, so that in 10 years’ time there will be another group of people who are better than their predecessors and who are running GIC.” A pipeline of tested leaders goes to the very heart of GIC striving to be master of its destiny for generations to come.

• Second, GIC must maintain “the highest reputation, conducting itself in a manner that is beyond reproach”, Lee said. GIC’s good name, he elaborated, rests on its record of prudence, competence and integrity. These values were paramount to him and Dr Goh, and have framed how GIC has developed and invested.

The reputation that GIC has secured will be even more important in a future where cross-border investments might be stifled by geopolitical tensions and protectionist sentiments. GIC’s investment activities have thus far not been hampered, as it is largely viewed as an investor without political agenda, invests for the long term and is not out to make a “fast buck”, and adheres to the laws of the home country as well as its own high governance standards. Today, more than ever, reputation, integrity and trust, values encapsulated by PRIME, will be prized. They will confer GIC the cachet to be viewed as valued investors and partners.

• Third, GIC must “capitalise on its global reach, multi-asset class capabilities and long-term perspective.”

Lee was referring to GIC’s success in breaking into new markets, establishing itself in developed markets and attaining a global reach that is rare among SWFs. Thus, GIC was an early investor in real estate and private equity and is now among the top global investors in both. GIC was also ahead of its peers in investing in emerging markets, including Asia. These accomplishments set a foundation for future success.

GIC has also continued to broaden its investment bandwidth. The NIF opened the way for GIC to acquire a fluency in investing in cross-asset and idiosyncratic situations. GIC will continue to capitalise on these advances to find new sources of returns to supplement the Policy Portfolio.

Lee also referred to GIC’s “long-term perspective” as an asset. Oftentimes honoured more in word than in deed, that perspective, however, is foundational to GIC’s investment philosophy, a tenet upheld by its Client and board of directors. Some would cite this as GIC’s primary strength – that the stakeholders GIC directly reports to can take a long-term perspective, even amid crises, and shield GIC from political considerations. There is therefore “a clarity, a steadiness, no flip-flopping” that allows investment professionals to do their work purely on investment grounds and on a long-term basis. And, by taking the long view, GIC can take advantage of more investment opportunities compared to investors who have a shorter time frame.

• Fourth, GIC must have “the courage and conviction to take original, bold, strategic, and forward-looking decisions.” It must avoid a tendency, Lee observed, commonly seen in companies that grew larger and more established, where “the impetus to follow conventional practices will grow stronger. This could lead to mediocrity.”

Here, Lee was alluding to a crucial value that brings life to the enduring themes of how Singapore has better control of its destiny because of its reserves, and how GIC itself can better control its fate – bold vision.

This bold vision conceived the creation of GIC and its every critical advance since. Dr Goh’s inspired recommendation that Singapore’s long-term reserves should be managed by a professional company was an unconventional idea in 1981. Lee Kuan Yew’s remarkably prescient prognostications on future trends and their implications for GIC primed it for the unfolding tectonic shifts in the world economy. Each of the leaders who helmed GIC – Yong Pung How, J Y Pillay, Lee Ek Tieng, Dr Tony Tan and Lim Siong Guan – broke from the past during their tenures. They re-shaped and rebooted GIC, and set the stage for it to move to a higher level of performance.

Can GIC build on that legacy of spirit, confidence and vision? Formidable as the challenge is, there are grounds for optimism. GIC’s board of directors and Client are informed about and receptive to new approaches. Learning and seeking fresh ideas is second nature to GIC. The constant ferment of ideas breeds innovation. GIC’s history itself is a story of breakthroughs accomplished. The inception of the NIF is a vivid example that innovation and creativity are not confined to past GIC leaders.

More recently, the shift to new, more demanding areas to adapt to a changing investment landscape suggests a willingness to apply bold, innovative solutions. GIC is not done with going back to the drawing board again. Reassuringly, it reflects the underlying confidence among the present generation of leaders that they can re-make GIC once more, no matter the complexity of the task. That confidence arises firstly from the capabilities and the bench GIC has developed. More than that, at heart it arises from a tradition of bold vision and successful ground breaking, a tradition that future generations of GICians can find inspiration in.

Explore more BOLD stories:

Prologue: Bold is driven by purpose
Chapter 1: Bold writes its own stories
Chapter 2: Bold stands its ground
Chapter 3: Bold sees true value
Chapter 4: Bold resists external pressure
Chapter 5: Bold breaks convention
Chapter 6: Bold loves a blank canvas
Chapter 7: Bold walks the talk
Chapter 8: Bold makes something out of nothing
Epilogue: Bold stands the test of time
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