GIC has just released its 2020/21 report and, as always, it is very conservative in the way the data is presented. This is typical of the corporation, which focuses on highlighting the lower real numbers (that is, adjusted for inflation).
As you can see from this graphic, it looks pretty unimpressive:
It seems to be part of the general policy not to brag about the success of the investment of money that is held as reserves, so as not to attract unwanted attention both from abroad and from the country (where many might begin to wonder why investments cannot be spent more generous way). between the people).
GIC reported that its 20-year moving annualized real rate of return has reached 4.3%, up from 2.7% reported last year at the height of the pandemic-induced stock market crash.
It may not seem like anything extraordinary, but there is a bit that we have to unpack before we can compare the figures to anything else.
Investments are generally valued at their nominal rate of return but, as I said, GIC takes a conservative approach when correcting its figures for inflation. Once we reverse this adjustment, we can see what is really happening.
What a difference a year makes
The annualized nominal rates of return are 8.8 percent for the successive five-year period, 6.2 percent for the decade, and 6.8 percent for the last 20 years.
It means that in the last five years, the cumulative return on investment is 52.4 percent, 82.5 percent during the last decade and 272.7 percent over the 20-year period. According to that latest figure, GIC has actually outperformed the US stock market, which has grown by around 220% between 2001 and 2021.
It’s worth noting that these numbers weren’t that high last year, when equity markets fell just before the end of GIC’s financial year on March 31, reducing them to 21%, 66%, and 145.8% respectively.
Indirectly, it shows us another reason why GIC insists on reporting annualized figures adjusted for inflation over long periods of time rather than year after year. A single year can have a huge impact even on long-term cumulative numbers, especially if the annual report comes at a bear or bull market time.
This year, the 20-year average saw the inclusion of a strong rally in stocks during 2020/21 and a drop from the 2000/01 crash following the dot-com bubble.
Whenever these numbers go up, that would be great news, but the reverse is also true.
Steep falls due to unpredictable crises would fuel criticism, especially since most people do not understand exactly what they mean. So it’s understandable why GIC chooses to emphasize more conservative metrics.
As it stands today, GIC has increased its portfolio in half in the last five, nearly doubled in ten, and nearly tripled in twenty years.
Some people may begin to point out that the stock markets have performed better, at least in the last five to ten years, but in reality, GIC keeps your money safer.
Only up to 65 percent of your portfolio could be invested in stocks or other risky assets (actually, it’s much less today). The risk profile of these investments is more conservative than that of a volatile stock market that can experience large swings from year to year.
This is particularly important as GIC is indirectly managing money from the Central Provident Fund (CPF), after the fund exchanged them for special government-backed securities, the proceeds of which land in GIC for a profitable investment.
45 percent of funds are held in bonds and cash, eight percent in solid real estate, that is, more than half of the funds are safely stored away from volatile stocks, while the entire portfolio continues to produce a commendable return on investment.
Despite all these limitations, GIC performs almost as strong as Temasek Holdings and, let’s not forget, over a period longer than 20 years, it has actually outperformed the equity markets.
This is not a bad feat for a government corporation (which cannot take as much risk as stock traders) during a period spanning from the dot-com bubble and September 11, through the financial crash of 2008/09 to the COVID-19 pandemic today.
Although you may be reading about quite small figures being reported in the news today, they actually add up to a lot more than meets the eye.
Featured Image Credit: Reuters