20141205 Why is GIC betting bigger with our CPF?

I refer to “GIC beefs up real-estate portfolio with US$8.1b (S$10.58b) purchase of Ind Cor”. (BT, 3 Dec)

Blackstone had plans for IndCor’s IPO which valued IndCor at about US$8 billion before GIC stepped in with its US$8.1 billion offer. By taking a 100% stake, should the market for industrial property turn sour, it would be impossible for GIC to exit its investment without huge losses. In fact, GIC does not have an exit strategy as is evidenced by its biggest investment – UBS.

Four years after GIC’s ill-timed $14 billion bet on UBS, Tony Tan, GIC ex-deputy chairman, said “we look to continue to hold on to our stakes in UBS and Citigroup for many years to come”.

It’s easy for Tony Tan to say the investment is “for many years to come” because it is not his personal funds/PAP’s money. Tony Tan could have meant forever.

Is this how GIC invests our CPF?

The IndCor deal is similar to GIC’s investment in the Bank of America Merrill Lynch Financial Centre (MLFC) in 2007 – both deals were struck after a huge run up in asset prices. After rental returns were offset by exchange rate loss, the S$1.2 billion MLFC investment earned close to nothing after 7 years.

DJIA chart and GIC’s investment entry

Although Blackstone had taken some risks when it bought assets at depressed prices, it appears GIC is taking a much higher risk ‘investing’ at inflated prices. Will this be a repeat of GIC’s MLFC investment?

GIC CIO Lim Chow Kiat: “Our patient capital allows us to benefit from holding investments that take longer to realise their potential.” If GIC really had patient capital, it would have waited for yields to rise after asset prices have fallen. From the above chart, GIC has clearly done the opposite.

“Patient capital” allows a fund manager to scour for underpriced assets, similar to Blackstone. “Patient capital” is not merely about holding underwater investments forever simply because there is CPF inflow into GIC every year ie since 2008, $20 billion of our CPF have been channeled into GIC every year. (page 111)

GIC’s real estate holdings accounted for 7% of its portfolio in March. With an estimated $400 billion of assets under management, it would mean GIC had already invested about $28 billion in foreign real estate.

As a proportion of GIC’s real estate holdings, IndCor’s $10.58 billion investment boggles the mind. Although some of GIC’s billion/multibillion bad investments/wipeout are now common knowledge, GIC has yet to disclose how it recouped its billion dollar losses. Is GIC betting bigger with our CPF to recoup previous huge losses?

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7 Responses to 20141205 Why is GIC betting bigger with our CPF?

  1. CK says:

    You have actually answered your own question why GIC is getting bigger with our CPF by referring to the fact that there is a consistent inflow of $20b a year. Obviously these have to be invested – otherwise how to pay even the miserly interest to CPF? Even though criticism of GIC is fair game, there needs to be some semblance of proportion and some idea of reality. The proportion sense is that this Indcor investment likely represents 2.5% of GIC’s total exposure: large in dollar and cents but not so in portfolio allocation terms. The sense of reality is that in any portfolio managed even by the best fund manager in the world is likely to contain a fair number of investments running underwater at any given time. Yes being a long term and patient investor means holding underwater investment for some time provided one is still forecast better performance later. GIC has recoup losses from 2009 – don’t need to take the government’s word for it, if one is a investment professional, one can construct a model portfolio to track its returns by using the allocations and risk metrics given in the annual report, Perhaps, you need to do a bit more work than reaching for the easy assertions.

    • Xmen says:

      @CK –

      I get your point. But here is a headline from WSJ – “Singapore’s GIC Fund Wagers on U.S. Property” http://online.wsj.com/articles/singapores-gic-fund-wagers-on-u-s-property-1417561000

      I hope GIC has done its due diligence before plunging into such a mega deal because a mistake can cost taxpayers billions. Your argument can be used in the purchase of the western banks during GFC and the Chinese banks recently. IMHO, those were reckless and irresponsible “investments” for a pension fund. WSJ uses “wagers” to describe this latest deal. I am not sure if I agree with that term but Blackstone certainly comes out a winner here.

      • phillip ang says:

        GIC appears to be behind the curve because it is run by bureaucrats. Its board of directors are almost all politicians or civil servants who know next to nothing about investing.
        GIC doesn’t seem to understand something as basic as past performance is no guarantee of future returns. When it took only 3 days to decide on investing in UBS, it was probably assuming an unchanged financial landscape despite the volatility. When it is investing $10 billion on a single deal almost 6 years from the trough of the stock market, it really makes one wonder.
        Blackstone is the one with patient capital and time will prove it to be the winner.

    • phillip ang says:

      Hi Chris
      The top 10 SWFs are all investing budget surpluses/oil revenue. Except GIC. GIC is no ordinary SWF because it is the only SWF handling retirement funds legislated as official foreign reserves. It should not take similar risks as other SWFs which do not have ‘maturity dates’. CPF members grow old.
      There is no such thing as holding bad investments for “many years to come”. Tony Tan should not have mistaken personal funds belonging to CPF members as belonging to the state.
      From the risks GIC has assumed, it does not appear to be investing to fund CPF obligations.
      When GIC invests with a view to profit from price appreciation, it amounts to speculation.
      GIC doesn’t appear to be able to pay CPF members through dividends when an increasing number of retirees reach 65. If its speculative investments fail, will 65 be increased to 70?
      It can be seen that GIC discloses minimal information in every piece of news. Is it possible then to construct an accurate model portfolio from GIC’s data?
      I hope you could enlighten Singaporeans with a piece on GIC. What would be of interest is the actual amount under GIC’s management.
      Thanks for your advice. 🙂

      • Confused says:

        Hi, Philip,
        PAP infact is well aware that they need to legislate our cpf into very special SSGS scheme so that they can use it as “Legitimate Reserve” like what the other SWFs are doing.

        From your previous post, it is clearly that our cpf is being forced into SSGS at the rate of about 20B annually in the recent years. With this, it looks like the SSGS is designed with no redemption date, why should it? It is now logical to draw a conclusion or speculation as all these gel in very well and it is clearer now.

        Without the need to redeem, The PAP (through GIC & Temasek) can invest all these monies, never mind win or lose as there will not be any margin call like in real life with any of the other funds. Lose, never mind, no one need to take responsibility. Win, yes, Temasek said it will share the success of the Fund with its people and they will stand to gain huge performance bonus. Tell me, who doesn’t want to be in this boat? I supposed the same mentality must be adopted GIC, the same family.

        You mentioned that if its speculative investments fail, will 65 be increased to 67? Don’t worry, it is in the pipeline, akan datang. I bet it is going to 70 very very soon.

        You will not live to withdraw all your cpf until your death. In fact, CPF and Medishiled Life will suck you dry depending if you opt for standard or basic as the 2 different schemes will let you choose your preferred pace.

        As this cpf is legislated into SSGS, and we were told that the government is guaranteeing the cpf return all these while. We have yet to hear from our Law Minister if what the government is doing or saying is right from the legal point of view.

  2. phillip ang says:

    Lim Boon Heng has also mentioned raising the retirement age to 70. There is an ulterior motive and PAP is preparing the ground well in advance. PM Lee has mentioned a partial lump sum CPF to be returned at 65. But this is very doubtful. If it could, then the withdrawal age would not have been raised to 65 in the first place. Worse, paying us in instalments till we die.
    The PAP is not preventing scrutiny of GIC’s investments for nothing. If there is nothing to hide, why go through all the trouble and lose political mileage?
    I think we should continue to chip at the transparency issue as this is really indefensible.

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