GIC’s forecast of lower returns is based on high valuations across most major asset classes and expectations of modest economic growth in the long term.
The fund’s annual report highlighted demographic headwinds, high debt levels and slow productivity growth as ongoing concerns. Uncertainties around economic inequality, populism, geopolitical conflicts and the potential negative impact of disruptive technologies have not gone away either.
“We are prepared for a period of protracted uncertainty and low returns,” GIC CEO Lim Chow Kiat said in a statement.
Kiat added that GIC has taken a cautious stance due to a combination of stretched valuations, high policy uncertainty and unresolved economic imbalances.
“We remain cautious and recognise that to generate good returns over time, we have to be prepared for periods of underperformance relative to the market indices, some even for a stretch of several years,” Kiat said.
The fund reported a 20-year annualised real rate of return of 3.7% above global inflation for the financial year ending in March 2017. It is lower than 4% it reported the year before.
The annual report noted that the rolling 20-year real rate of return can reflect a significant cyclical element, even though it measures returns over the long-term. For example, the 20-year real return for a portfolio consisting of 65% US equity and 35% bonds was below 2% in the 1980s, but as high as 10% in the 2000s.
According to the report, the GIC portfolio is constructed to be “resilient” across a broad range of plausible market and economic conditions, while generating positive long-term real returns. The asset and geographical mix have remained broadly unchanged from a year ago.
Asset mix of the GIC portfolio
|
Asset mix |
31 March 2017 (%) |
31 March 2016 (%) |
Policy portfolio |
|
Developed market equities |
27 |
26 |
20%-30% |
|
Emerging market equities |
17 |
19 |
15%-20% |
|
Nominal bonds and cash |
35 |
34 |
25%-30% |
|
Inflation-linked bonds |
5 |
5 |
4%-6% |
|
Real estate |
7 |
7 |
11%-15% |
|
Private equity |
9 |
9 |
9%-13% |
Source: GIC
Geographical distribution of the GIC portfolio (March 2017)
|
Region |
Allocation (%) |
|
US |
34 |
|
Asia ex-Japan |
19 |
|
Eurozone |
12 |
|
Japan |
12 |
|
The rest of Americas |
6 |
|
UK |
6 |
|
Middle East, Africa and the rest of Europe |
6 |
|
Latin America |
3 |
|
Australasia |
2 |
Source: GIC
While the long-term forecast remains cautious, the report noted that GIC’s short-term growth outlook had improved.
“There are signs of strengthening industrial production, trade and labour markets, as well as acceleration in business and consumer sentiment,” the report said.
