GIC lost 41%? Accountabiliity please!

[Goh Meng Seng]

Dear Scroobal,

Merill and Citibank were considered blue chips, no doubt about that but risk assessment should be done with all information available. Blind belief in labels during investment will be very costly.

There are no lack of examples that even blue chips will fail and bankrupt and banks are not immune to bankruptcies and bank runs. Granted that these two banks are big, but big does not equate to immunity.

I think the proper assessment should be made by evaluating ALL INFORMATION available, especially for SWFs which are sophisticated invested entrusted with public money. I think someone here has already reconstructed the scenario at that time when GIC and Temasek were considering in investing into these banks.

Mistake me not. If they have bought shares of these banks way back in 2004 and now lost a bomb in them, I will not blame them because they have invested at that point of time with much less risk considerations. But situation at the end of 2007 was very much different from 2004 and due diligence should be made before throwing billions into them when distress calls were made all over the world. To me, these are the REAL SIGNS of risk involved and they are DEFINITELY MORE RISKY than they used to be, as compared to 2004.

It would of course be more interesting to know what else causes the hefty losses but the point is that if they are so willing in investing into these banks with that type of prevailing risks at that moment, it is a strong indication that GIC and Temasek has very much higher risk appetite that a normal SWF should have.

Goh Meng Seng

UBS, Merill and Citibank were at that time considered blue chips and their shares values plunged heavily. No one in living memory would have thought that they would go their way that they did. The mindset of most people is the deep discount opportunity that rarely appears in blue chips.

At that time, I would not consider them as risky. Others, other than SWF did not go in as they did not have deep pockets so it is not a reflection that others were wiser.

However, these 3 alone should not have caused that huge slump for the whole portfolio.

I would agree with you that preservation was not the order of the day when it should have been but I disagree about your remarks about the banks being risky.

It will be good to see what other investments caused these loses and the lessons to be learnt.

 

[SamuelStalin]

There are quite a few speculation about

In life, what matters is not mistakes and problems but rather, how to deal with them (ie problem-solving skills) as regards to the big picture.

 

[Zombie]

I believe the strategy change occurred in 2006. Prior to that it was preservation. There is a comment by some other forummer earlier in this thread.

http://www.gic.com.sg/aboutus_story_milestone1.htm

In 1981, first Deputy Prime Minister and Monetary Authority of Singapore (MAS) Chairman, Dr Goh Keng Swee, recommended to Prime Minister Lee Kuan Yew that Singapore should create a specialised and separate investment management entity to invest Singapore's growing reserves abroad for better returns and to enhance the nation's wealth over the long term.

If you measure a nation's wealth by how much it can buy, then the objective would have been the same all the while ie it was never strictly capital preservation. But they may have turned more aggressive lately.

 

[Goh Meng Seng]

In life, what matters is not mistakes and problems but rather, how to deal with them (ie problem-solving skills) as regards to the big picture.

Dear Samuel,

Very true and this is about getting to the root of the problems.

Without know how the mistakes come about or what the problems are, you wouldn't even know where to start to tackle them.

Goh Meng Seng

 

[scroobal]

http://www.gic.com.sg/aboutus_story_milestone1.htm



If you measure a nation's wealth by how much it can buy, then the objective would have been the same all the while ie it was never strictly capital preservation. But they may have turned more aggressive lately.

I do agree that it was never meant to be purely preservation. Lets see what comes out from the woodwork.

 

[scroobal]

Dear Scroobal,

Merill and Citibank were considered blue chips, no doubt about that but risk assessment should be done with all information available. Blind belief in labels during investment will be very costly.

Lets put it this way - we are all looking for transparency and lets if the first steps are taken in that direction.

 

[Goh Meng Seng]

Lets put it this way - we are all looking for transparency and lets if the first steps are taken in that direction.

Dear Scroobal,

Yes, true, we are always fighting for transparency, accountability, checks and balances.

From the grapevines, the old man may step down graciously due to age and health.

Goh Meng Seng

 

[londontrader]

Dear Locke,

You raised some interesting issues
My comments follow:

1. Statens pensjonsfond - Utland (Norway's Government Pension Fund - Global)

I am well acquainted with the fund and have met members of the Norges Bank team (the fund managers). Rather nice chaps compared to the arrogant GIC people (maybe they just didn't like me). Anyway, Statens pensjonsfond - Utland is a fine example of how SWFs can maintain operational efficiency and still be accountable and responsive to their shareholders. Singaporeans should also note that open, accountable & responsive governments = open & accountable SWFs. Something to think about at the next elections.

2. 1% ownership limit (Statens pensjonsfond - Utland)

Just to update you: The original limit was set at 1% of the voting shares and capitalisation of a single company. Subsequently, it was raised to 3% in 2000, to 5% in 2005 and to 10% in 2008 (Norges Bank asked for 15% in 2007).

In practice, the fund has stakes in about 7000 companies worldwide with an average ownership stake of 0.6% against the upper limit of 5%. This is correct as of end 2007. BTW, I have my own reservations about the strategy and performance of this particular fund, but that's another story.

3. Small stakes vs concentrated holdings

a. In this business, most conventional fund managers keep to a 1% cap for very sound reasons:

- Any investment >1% normally invites compliance costs ie. regulatory issues etc.
- Large stakes have to be disclosed in a timely fashion and we (in the business) prefer to keep things secret (from our rivals) as long as possible.
- Most investment mandates impose a 1% cap unless the trustees are particularly risk seeking.
- Most importantly, small stakes are less risky!

b. Concentrated holdings are inherently risky

There is a large body of empirical work to support the above assertion. I don't have the time at the moment to reference these papers. However, if you're comfortable with econometrics, we can discuss this in more detail at a later date.

To summarize the findings:

- Small bets = lower volatility (ie. less risky) = decent but not spectacular returns over time.

- Concentrated bets = quite impressive returns* = lots more risk
*Note that there is evidence of survivorship bias in the dataset because the impressive returns were earned by the funds that didn't go bust!

The key risk factor identified seems to be stock selection skill (or the lack of). There are a couple of exceptional cases that stood out. Let's call these the Warren Buffet types ie. guys with superior stock picking skills that resulted in concentrated holdings which yielded high returns with no outsized risks.

So, concentrated bets are a HIGH RISK = HIGH RETURN strategy. Here is a recent example of what happens when this kind of strategy goes wrong:

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=azobDABpF9ZU

c. GIC

As far as I can tell, GIC keeps to small bets for their Public Markets Team. How do I know?

- From being one of their external managers in the past
- From their rather sober average annual returns of 5.8% (SGD) over 20 years = not very aggressive strategy
- From Ng Kok Song's press statement during the UBS purchase ie. this purchase deviates from their SOP of buying small stakes in companies.
- From the fact that GIC has to disclose big stakes in public mkts.

Do I think GIC should take on concentrated bets? ONLY if they are very confident that they have Warren Buffet type stock selection skills! I am not convinced in the aftermath of the UBS and CITI experience.

d. Temasek

They take on concentrated bets all the time! Temasek's long term annual average returns of 18% seems in line with a high risk appetite (that falls to under 10% over 10 years - Ho Ching was in charge for much of that period). They also have their fair share of expensive mistakes. I think they may need to rethink their strategy. Are they going to be a strategic investor for the govt or a manager of the national reserves?

4. Lack of diversity within the financial industry

It is not surprising given our tendency to hire the same kind of people, use the same software, input the same data and have the same incentives built into our compensation packages. It's no wonder that we tend to walk off the cliff together, so to speak!

A lack of diversity creates it's own kind of risk concentration. The world is better off without Mega Banks and Mega Credit Rating Agencies etc... You really need a diversity of participants and incentives in order for some balance during a financial crisis. BTW, GIC invested in UBS on the expectation that they were buying into the future world Mega Wealth Manager! Geee, that prospect is diminishing by the day.

I'm also particularly worried when I see so many of our young talents harbour ambitions of becoming star investment bankers and traders. Singapore seems to have an entire university (SMU) dedicated to producing bankers and traders! I have interviewed some young fellows who already trade private accounts (daddy's $) worth more that the limits we set for our junior traders!

Hiring a diversity of opinion is rather straightforward. We need to start looking at people who have done more than stare at spreadsheets all day and dream of becoming the next Soros. Some of the more enlightened institutions are already doing that.

5. Due Diligence

The amount of due diligence performed depends on the urgency of the situation. JP Morgan had a weekend to purchase Bear and BOA had even less time when buying Merrill. Ken Lewis lived to regret that later when the true nature of the Merrill Bal Sheet revealed itself. Didn't Temasek invest in that interesting bal sheet too?

In practice, investors have to decide rather quickly because of information leakage and strict disclosure requirements etc. Sophisticated investors should already know their target companies very well. The due diligence is actually a search for red flags eg. balance sheets that contain lots of toxic assets that no one (except the owner - usually desperate and willing to say anything to close the sale) can value. Sound familiar to you? Red Flags = slam the brakes and clarify before signing up!

The Abu Dhabi (not Dubai right?) fellows are famous for taking on risky concentrated bets. Therefore, they made the same mistakes that GIC and Temasek are guilty of. It wasn't a matter of more or less due diligence since they all saw the same red flags. They simply got too greedy ie. high risks = high returns. Have a look at the most famous Arab investor:

http://www.bloomberg.com/apps/news?pid=20601109&sid=a3pNjAm3wGxM&refer=home

Warren Buffet typically doesn't do much due diligence at all, since he spends all his waking hours researching and thinking about his targets for years. I am confident Buffet wouldn't have invested in CITI, UBS or Merrill during 2008 because of the red flags in their balance sheets. He finally decided on Goldman when the price got cheap enough. The Goldman balance sheet is clear of toxic stuff because they already sold it to Merrill and AIG before 2008. We know what happened to Merrill and AIG subsequently.

BTW, Here is my estimate for Warren Buffet's Performance over 2008

Per Share Book Value = $70,000 compared to $78008 1 year ago = DOWN 10% for 2008
This estimate is based on his SEC filings over 3 quarters in 2008 and taking into account the very bad 4th Q.
Note that the share price of Berkshire fell over 30% during 2008
Buffet doesn't measure his performance using that price because it's clouded by investor sentiment. Eg. Berkshire was widely acknowledged to be overvalued during 2007.

I wonder if GIC can beat -10% for 2008????
Note that 2008 is only the second time Buffet has lost $ (in book value) since inception. The other occasion was 2001 when he was down 6.2%

6. << I would still disagree about a risky bet >>

Well, if I can't convince you after all this analysis, we have to agree to disagree

7. << I do know loads of small investors who believed that the pricing was good historically and the macro picture would not collapse to the extent that it did >>

So, GIC and Temasek are no better than the loads of small investors? Hmmmm, I wonder if we're getting value from those overpayed people!

8. << For what its worth I do not consider it a risky bet at that moment because the financial reporting of that period was generally more positive >>

You need to put that positive spin in context:

a. It was generated mainly by 2 groups

- the financial industry who had a vested interest in trying to talk UP a dying mkt

- the govt types who needed to restore confidence in the system at all costs

b. There were many independent analysts who made more realistic comments. You might have read what Ken Rogoff wrote during that period?

c. Even the positive spin doctors had to agree with the realists that:

- This crisis is new and so we should discount historical precedents
- no one had any idea what those toxic balance sheets are really worth over the near, medium & long term.

9. << Its more negative and gloom and doom so my belief is they probably overshot on the down side >>

Actually, the current earnings expectations still look optimistic. I'm thinking we are due for more reality checks. In my experience, we hit the bottom when the news is still very bad but stops getting worse. Is that the case now?

Hope I addressed your questions adequately.

Cheers

 

[SamuelStalin]

http://www.gic.com.sg/aboutus_story_milestone1.htm

If you measure a nation's wealth by how much it can buy, then the objective would have been the same all the while ie it was never strictly capital preservation. But they may have turned more aggressive lately.

It's not the same really. Obviously you have never heard of the simple phrase 'saving by buying'.

 

[nickers9]

agree, they should come clear.

i really hope in the next few years, our pap wouldnt increased taxes or gst or any other things to squeeze the singaporeans to cover up the losses what gic incurred!

 

[scroobal]

i really hope in the next few years, our pap wouldnt increased taxes or gst or any other things to squeeze the singaporeans to cover up the losses what gic incurred!

Our biggest drawcard for foreign individuals and firms is the low tax are and it is also the reason why HK is attractive. That will remain. As Singapore has a huge lobby of locals who are businessmen and developers who have the ear of the govt, I doubt they will increase it.

What you will see is the increase of GST. GST is indirect but very lucrative tax regime. It always does better than predicted by the Govt. Another area of increase would be other indirect taxes.

Its biggest challenge however would be massive contraction of the economy when foreigners leave as they form a large significant group. Its a siituation that the PAP painted itself into a corner in order to get rapid growth.

Foreigners would the agenda for the next GE. For the PAP, this would be the challenge
- keep the foreigners employed and fare badly in GE or
- start focusing on citizens, drive the foreigners away and suffer a massive economic downturn.

At the end of the day for a Singaporean who is unemployed or who has a family member who is unemployed, he does not care if the economy has flopped.

Thats the reason why developed nations have welfare safety net. It allows for sound judgements to be made even during a crisis and not be held ransom by the unforunate.

 

[Zombie]

It's not the same really. Obviously you have never heard of the simple phrase 'saving by buying'.

You are right.

The only "saving by buying" I know, relates to those frenzy-buying mentalities of aunties, due to successful marketing strategy.

I think, from the financial perspective, there is no true “saving by buying”.

Maybe you can tell me more.

 

[londontrader]

Thanks for the write-up. You are actually too kind. 15% loss is acceptable, anything more than that requires a broad inquiry with an independent team. Value/Capital preservation should be one and only primary apporach for national reserves. I think they must have been tempted by the SWFs of the middle East.

Dear Scroobal,

Felt that I was being quite fair, given:

1. There was no place to hide in 2008
2. The SWFs manage huge portfolios and can't be as nimble as others
3. They always talk about "long term" investments which suggests a lack of desire to realize "short term" losses (means they should have short term hedges instead!)
4. They made some serious mistakes over 2008 (you know what I refer to)

In light of all the above, if they kept the loss below 20%, I would give a passing grade. My expectation was 20-25% down IF they were doing their hedging properly. If GIC really did lose 41%, they should fire the lot of them!

Temasek behaves more like a strategic investor than investment manager. I fully expect them to have lost lots of our $ with their approach.

Maybe we should let Jim Rogers run a small part of the funds as a future benchmark for GIC and Temasek. I hear he is practically a Singaporean these days.

 

[londontrader]

Dear Londontrader,

Thanks for such a wonderful write up but apparently Locke does not really get the fundamental point right.

Goh Meng Seng

Dear GMS,

Just sharing my frustrations with anyone who is interested.

You seem to have a serious debate going with Locke
Let me share what I expect from my national reserves manager
That should be GIC because Temasek is behaving like anything but a SWF

GIC should have 3 objectives:

1. Preservation of capital which also implies preserving it's value against inflation.

2. Capital growth ie. excess returns above inflation while always keeping (1) in mind!

3. Current Income ie. to provide a little investment income to supplement govt spending (aimed at Singaporeans & not FTs etc.)

The presence of (2) and (3) = you can't have 100% capital preservation at all times. Some measure of risk must be taken to earn those excess returns.

A balanced fund should be the right structure to follow subject to:

a. No leverage
b. No exotic products
c. No unusually aggressive strategies
d. Less return in exchange for more clarity amid uncertainty
e. Hedge those so called long term assets so that we don't have to endure long periods of unrealised losses
f. incentives for good risk mgt as well as beating benchmarks
g. lots of oversight

In conclusion, I expect GIC to produce rather boring returns ie. decent & safe.

 

[londontrader]

Dear Locke,

You shouldn't even compare GIC & Temasek with Warran Buffet in that sense because the risk profile should be very different! Low risk low return but also low loss. GIC & Temasek should have much LOWER LOSSES than Warran Buffet, not COMPARABLE!

Goh Meng Seng

Dear GMS,

You will be surprised by the likes of Warren Buffet.

His record for capital preservation is pretty impressive ie. only 2 losing years since 1965. Add to that an average annual return of 20+ % over the long term vs GIC's 7.8% (USD) and Temasek's 18% (drops to 10% for the last 10 years). Here is a portfolio which has better returns and seems to be less risky!

I'll sleep better at night with chaps like Buffet managing my reserves.

 

[londontrader]

Dear Scroobal,

Just a response to your comment:

<< I would agree with you that preservation was not the order of the day when it should have been but I disagree about your remarks about the banks being risky. >>

Here is a simple thought experiment:

Your friend owns a large ship and offers to sell you a stake at a discount. Upon investigation, you find the following:

1. It's currently sailing in choppy waters

2. It's leaking and the engineers say they have never encountered a problem like this before

3. Your investment is urgently required in order to attempt a repair

4. There is no guarantee that the repair will work because the engineers haven't met this problem before. They think the usual methods will work and things should be back to normal again (hopefully!)

5. Some people think the choppy sea will clear up soon, others think the opposite. The probability of disaster (for the ship) increases the longer the sea stays choppy.

6. All the experts agree that none of them knows what's going to happen with any certainty. The more optimistic ones all work for your friend!

So, do you invest?
If so, is it a risky investment?

 

[Goh Meng Seng]

Dear Londontrader,

Thanks. These are reasonable configurations.

Goh Meng Seng

Dear GMS,

Just sharing my frustrations with anyone who is interested.

You seem to have a serious debate going with Locke
Let me share what I expect from my national reserves manager
That should be GIC because Temasek is behaving like anything but a SWF

GIC should have 3 objectives:

1. Preservation of capital which also implies preserving it's value against inflation.

2. Capital growth ie. excess returns above inflation while always keeping (1) in mind!

3. Current Income ie. to provide a little investment income to supplement govt spending (aimed at Singaporeans & not FTs etc.)

The presence of (2) and (3) = you can't have 100% capital preservation at all times. Some measure of risk must be taken to earn those excess returns.

A balanced fund should be the right structure to follow subject to:

a. No leverage
b. No exotic products
c. No unusually aggressive strategies
d. Less return in exchange for more clarity amid uncertainty
e. Hedge those so called long term assets so that we don't have to endure long periods of unrealised losses
f. incentives for good risk mgt as well as beating benchmarks
g. lots of oversight

In conclusion, I expect GIC to produce rather boring returns ie. decent & safe.

 

[scroobal]

Felt that I was being quite fair, given:

1. There was no place to hide in 2008
2. The SWFs manage huge portfolios and can't be as nimble as others
3. They always talk about "long term" investments which suggests a lack of desire to realize "short term" losses (means they should have short term hedges instead!)
4. They made some serious mistakes over 2008 (you know what I refer to)

In light of all the above, if they kept the loss below 20%, I would give a passing grade. My expectation was 20-25% down IF they were doing their hedging properly. If GIC really did lose 41%, they should fire the lot of them!

Temasek behaves more like a strategic investor than investment manager. I fully expect them to have lost lots of our $ with their approach.

Maybe we should let Jim Rogers run a small part of the funds as a future benchmark for GIC and Temasek. I hear he is practically a Singaporean these days.

Very well argued. I see where you are coming from.

 

[scroobal]

In conclusion, I expect GIC to produce rather boring returns ie. decent & safe.

Yes, the word "boring" is what reserve is all about.

 

[funglung]

i really hope in the next few years, our pap wouldnt increased taxes or gst or any other things to squeeze the singaporeans to cover up the losses what gic incurred!

THE ONE AND ONLY WAY IS TO KICK THOSE BASTARDS IN WHITE ALL OUT.

THEY BLEED AND SQUEEZED 400++ BILLIONS FROM SINKIES INTO TEMASICK AND GIC ALREADY


THEY WILL CONTINUE TO BLEED AND SQUEEZE EVEN MORE BILLIONS





GO ALL OUT TO KICK ALL THOSE BASTARDS OUT

ALL OF THEM


IF NOT FOR YOURSELF, THEN FOR THE FUTURE OF YOUR CHILDREN

THERE WILL NOT BE AN OBAMA AS PRESIDENT OF USA IF THE CIVIL RIGHTS MOVEMENT THERE WAS INTIMIDATED BY BEATINGS AND LYNCHINGS IN THE PAST.


THE TOBBLING OF LKY WILL NOT BE EASY, AND CAN BE BLOODY AS WELL.
THEY WILL NOT GIVE UP THE BILLIONS THAT THEY SUCKED FROM YOU AND CAN CONTINUE TO SCREW FROM YOU NOW AND IN FUTURE.


ONLY YOU HAVE THE POWER TO SAY 'NO MORE OF THAT' AND THROW EVERYONE OF THOSE BASTARDS OUT






Sinkies must organise themselves

Show that they got balls and can stand up to LKY intimidation.

Big money at stake.

Already 400++ billions got sucked and bled by LKY into his Temasick and GIC

EVEN IF NO ELECTIONS, SINKIES MUST SPEAK WITH ALL THEIR FRIENDS AND ALL THEY KNOW

STAND UP TO THAT BASTARD LKY AND PAP BLOODSUCKERS

STAND WITH ALL THOSE THAT FIGHT BASTARD LKY

OR STAND UP YOURSELF IN YOUR CONSTITUENCY

DONT BE BULLIED BY THAT FUCKING COWARD LKY USING HIS CORRUPT KANGAROO COURTS