GIC’s Investing Approach

5 February 2015

• What’s unique about investing?

• What’s GIC’s approach?

• What’s value investing?

• What’s long-term investing?

What’s unique about investing?

What’s the key difference between a good investor and a good engineer?

• Only ≈5% of US mutual funds that aretop quartile performers this year canbe expected to be top quartile in thenext 3 years

• Would you expect a top engineer ordoctor or lawyer to fall from grace aseasily as a top investor?

• Why?

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• Not easy to beat the market; you’llhave to be smarter than many smartinvestors out there

• Beating the market is a relative game –not absolute, unlike building a bridgeor operating on a patient

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Takeaways

Questions every investor has to ask himself

• Smart enough to invest actively?

• What’s my edge?

• How to sharpen my investmentframework and process?

• What mix of active and passiveinvesting?

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What’s GIC’s approach?

GIC’s Mandate

Our client requires us to achieve good long-termreturns to preserve and enhance the international purchasing power of the reserves

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Singaporeansbenefit from GIC's performance

• The investment returns of GIC and MAScontribute toward the annualgovernment budget to be spent forthe benefit of Singaporeans

• Each year, this contribution amounts toabout S$8 billion, or about 15% of the totalgovernment budget

• The Singapore Constitution allows thegovernment to utilise up to 50% of the NetInvestment Return

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So what’s GIC’s investment approach?

Right mix of market returns (beta) and returns from active management (alpha)

Strong governance framework

Five investing principles

1

2

3

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Right mix of beta and alpha

• Smart enough to invest actively?

• What’s my edge?

• How to sharpen my investmentframework and process?

• What mix of active and passiveinvesting?

1

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Mix of beta

and alpha –

Considerations

• Info efficiency

• Arbitrage

• Market impact

• Transact-ion costs

• Govt’s LT goals

• GIC’s strengths

• Riskier assets

• Value strategies

4. Long-term

Impact

1. GIC’s Edge

2. Market Efficiency

3. GIC’s Size

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Strong governance framework

REFERENCE PORTFOLIO

Passive Portfolio; set at 65% global equities; 35% global bonds

Represents the government’s risk tolerance

+ =

POLICY PORTFOLIO

ACTIVE PORTFOLIO

GIC PORTFOLIO

Allocation among six core asset

classes

Key driver of returns over the

long term

Approved by the GIC Board

Comprises overlay of active,

skill-based strategies

Adopted by GIC management

Overseen by GIC Investment Board

Represents actual exposures of the

GIC portfolio

Within risk limits set by

Government

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GIC’s Policy

Portfolio

Private Equity

Real Estate

Inflation-linked bonds

Nominal bonds & cash

Developed Market equities

Emerging Market Equities

11%-15%

9%-13%

4%-6%

25%-30%

20%-30%

15%-20%

As of 1 April 2014

Inflation-linked Bonds

Nominal Bonds & Cash

Real Estate

Private Equity

Developed Market Equities

Emerging Market Equities

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GIC’s 5 investing principles

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Pursue intrinsic value and maintain price discipline

Practise long-term investing

Pick our spots: be focused and leverage our strengths

Pay attention to risk control

Prepare for the future

What’s value investing?

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“the discipline of buying securities at a significant discount from their current underlying values and holding them until more of their value is realised”

Value investing, according to Seth Klarman

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Ingredients of successful value investing

• Info efficiency

• Arbitrage

• Market impact

• Transact-ion costs

• Govt’s LT goals

• GIC’s strengths

• Riskier assets

• Value strategies

4. Long-term

Impact

1. GIC’s Edge

2. Market Efficiency

3. GIC’s Size

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2. Investing in and divesting Global Logistics Properties in end-2008 and 2010

Examples of value investments

3. Investing in and divesting Springer, the world’s second-largest publisher of academic journals & largest publisher of academic books, in 2009 and 2013

1. De-risking and re-risking the GIC portfolio in 2007-08 and 2009

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• Need emotional fortitude and a disciplined investment framework/process

• Many inputs into the framework are more art than science

• Structural changes could surprise even experienced investors

• Not all points on the business cycle and valuation cycle are favourable to value investors

Practical challenges in value investing

What’s long-term investing?

Government of Singapore Investment Corporation Pte Ltd. 21

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Having the option, institutional capability and psychological fortitude to evaluate and hold an investment for the long term if necessary

Long-term investing –a working definition

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• An option, not obligation to buy and hold

• Ex-ante, not ex-post

• Function of price, not time

• Capitalises on:

– Short-term market fads and irrationality

– GIC’s capabilities: research, processes, incentives

– Personal mental fortitude

Long-term investing in practice

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LT investing is embedded in GIC’s value strategies and policy portfolio

• Info efficiency

• Arbitrage

• Market impact

• Transact-ion costs

• Govt’s LT goals

• GIC’s strengths

• Riskier assets

• Value strategies

4. Long-term

Impact

1. GIC’s Edge

2. Market Efficiency

3. GIC’s Size

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LT investing is embedded in GIC’s value strategies and policy portfolio

• Info efficiency

• Arbitrage

• Market impact

• Transact-ion costs

• Govt’s LT goals

• GIC’s strengths

• Riskier assets

• Value strategies

4. Long-term

Impact

1. GIC’s Edge

2. Market Efficiency

3. GIC’s Size

GIC’s Policy Portfolio

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Higher risk, higher return in the long term

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Which is a better investment?

• S&P 500 (green) or US 10-year bonds (yellow)?

• Annual return: S&P 10.5% or bonds 8.7%?

• Sharpe: S&P 0.49 or bonds 0.55?

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