Singapore wealth fund takes long view

Peter Thal Larsen & Martin Dickson
Financial Times
04 Feb 08

Tony Tan has been thrust into the spotlight. Since taking over as deputy chairman of Singapore’s Government Investment Corp several years ago he has maintained a low profile, in keeping with the giant fund’s preference for attracting as little attention to itself as possible.

But in the past few weeks GIC has abandoned its low-key approach in spectacular style. In December it injected $9bn (£4.6bn, €6.1bn) into UBS to boost the Swiss bank’s capital base, which had been eroded by the meltdown in the US subprime mortgage market. A few weeks later it invested a further $6.9bn in Citigroup.

These bold moves make GIC the most prominent participant in the recapitalisation of some of the world’s largest banks, which have received more than $40bn in the past few months, much of it from state-sponsored investment funds in the Middle East and Asia. The investments have also put the 27-year-old body at the centre of the debate over the funds’ growing influence.

Critics have accused sovereign wealth funds of seeking to exert excessive influence, of acting as an extension of governments’ foreign policy goals, and of lacking transparency.

In a rare interview on the fringes of the World Economic Forum in Davos Mr Tan – a former deputy prime minister of Singapore – acknowledges the concerns. “I think it’s understandable that there should be some concern in Europe and in America as to what the agendas of these funds are; do they have political motives, are they investing for other than commercial reasons?” he says.

However, he is also keen to distance GIC from some of its newer rivals. Established in 1981 with a mandate to preserve the wealth Singapore was accumulating in its foreign currency reserves, GIC describes itself as a conservative, long-term fund manager with a portfolio spread across bonds, equities, commodities, property and alternative assets such as private equity and hedge funds. Mr Tan also stresses it is a passive, long-term financial investor.

Nevertheless, it remains cloaked in secrecy. GIC says it manages more than $100bn, though analysts think the figure is three times that amount. It gives no information about how funds are allocated between asset classes. And the only indication of its performance came two years ago when, on its 25th anniversary, Lee Kuan Yew, Singapore’s first leader and GIC’s chairman, revealed the fund had generated annual returns of 9.5 per cent in dollar terms, or 5.3 per cent after inflation.

What is clear, though, is that GIC’s investments in UBS and Citi were made possible by a canny bet on the markets.

Executives had in recent years become concerned about the amounts of leverage in the financial markets. They had already decided to avoid more esoteric financial instruments, such as collateralised debt obligations. “We studied CDOs on many occasions in the past several years. We could not understand who was bearing the risk,” Mr Tan says.

After a thorough study, GIC decided in mid-2007 to reduce its exposure to equities by shifting part of its portfolio into cash, something the fund had not done for years. It proved to be a smart move, though Mr Tan acknowledges there was an element of good fortune about the timing.

The decision left GIC poised to act quickly when UBS called in early December looking for cash. According to people familiar with the matter, the Swiss bank initially asked for about $2bn, but GIC quickly indicated it was willing to put up much more.

To some observers, the UBS and Citigroup investments signal GIC is taking a more aggressive approach. But Mr Tan says the most recent deals were “unusual transactions brought about by an unusual combination of events” that are unlikely to be repeated. “I do not see this as a normal line of business for GIC.”

He acknowledges that greater scrutiny will force GIC to become more transparent and endorses the planned code of conduct for sovereign wealth funds – though he thinks it should be flexible and voluntary.

Close observers suggest that changes will be gradual and limited. “There hasn’t been a wholesale conversion to the general principle of transparency,” says Garry Rodan, of Australia’s Murdoch University.

Additional reporting by John Burton in Singapore

%d bloggers like this: