Temasek Holdings on Tuesday (Jul 11) reported a 5.2 per cent fall in the value of its net portfolio and signalled a “cautious” investment stance ahead amid a challenging macroeconomic environment.
For the financial year ended Mar 31, its net portfolio was valued at S$382 billion (US$287 billion), down S$21 billion from the record S$403 billion it achieved a year ago, according to its latest annual review.
Its one-year total shareholder return, which takes into account all dividends distributed to the shareholder minus any capital injections, turned negative to -5.07 per cent from the 5.81 per cent gain a year ago.
The performance for the past year can largely be attributed to a fall in equity valuations, both in the public and private markets, Temasek International’s chief financial officer Png Chin Yee said at a press conference.
While its portfolio companies in Singapore remained resilient, its global direct investments saw a reversal of gains from the high valuations in the last two years, particularly in the technology, healthcare and payments space, as valuations de-rated in the higher interest rate environment.
The performance also factored in some impairments and write-downs over the past year, such as the write-down of its US$275 million investment into failed cryptocurrency firm FTX, according to Temasek’s representatives at the press conference.
The macro-environment was also a challenging one, marked by persistent inflation despite rate hikes by central banks, intensifying geopolitical tensions and rising nationalism and protectionism that have led to a “marked shift” away from globalisation that has supported global growth over the past 20 years.
Over a longer term, its 10-year and 20-year total shareholder returns stood at 6 per cent and 9 per cent respectively, down slightly from 7 and 8 per cent in the previous year.
The state investor is one of the three entities tasked to invest Singapore’s reserves, with part of its returns tapped every year for the annual Budget.
Under the Net Investment Returns Contribution (NIRC) framework, the Government can spend up to half of the long-term expected investment returns generated by Temasek, sovereign wealth fund GIC and the Monetary Authority of Singapore.
Temasek invested S$31 billion and divested S$27 billion in the last financial year, as it adopted a cautious approach amid global uncertainties. Deal activity globally also slowed down as liquidity tightened, it said.
Overall, Asia remained the anchor of the investor’s portfolio at 63 per cent, with Singapore (28 per cent), China (22 per cent) and the Americas (21 per cent) remaining the top three markets.
Transportation and industrials (23 per cent) and financial services (21 per cent) continued to account for the biggest sectors in Temasek’s portfolio.
The proportion of unlisted assets in its portfolio made up 53 per cent of the portfolio, up 1 per cent from a year ago, which saw unlisted assets overtaking listed assets for the first time.
Temasek said its unlisted portfolio is “well diversified” across geographies and sectors, with steady growth over the years due to investments in “attractive opportunities” in private markets and the increase in the value of its unlisted assets.
Over the last decade, the unlisted portfolio has generated returns of over 10 per cent per annum on an internal rate of return basis, delivering higher returns than its listed portfolio, it added.
These include returns when the unlisted investments were listed or sold, as well as from the strong performance of the underlying companies. For example, some of its holdings, such as payments technology provider Adyen and on-demand services platform Meituan have listed with “significant value uplift” in the past five years.
On its early-stage portfolio, Ms Png said Temasek invests in early-stage companies as part of identifying future trends and to gain insights into emerging technologies and business models.
To manage the higher risks that come with these investments, it has kept its exposure to early-stage companies to 6 per cent of its total portfolio, she added.
FTX AN “ABERRATION”
Addressing the “disappointing” venture into FTX, chief investment officer Rohit Sipahimalani said at the time Temasek decided on the investment, the cryptocurrency firm seemed like one with good technology, rapid growth in market share and “very regulatory-compliant” based on regulators’ checks.
Temasek’s team had also spent time doing its due diligence on FTX but “it’s impossible to always discover fraud”, Mr Sipahimalani added.
Temasek has drawn lessons from the failed investment, he said, such as enhancing its due diligence processes and the operational areas it looks at, especially for high-growth companies.
“We hope that we’d be able to avoid such situations in the future, recognising that fraud is something that is difficult to protect against completely,” said Mr Sipahimalani.
“And we do recognise that early-stage investing will have binary risks and we need to manage (those) risks,” he added.
Temasek said in May that it had cut the compensation of its senior management and the investment team involved in the failed investment. An internal review conducted by an independent team found no misconduct by the investment team in reaching their investment recommendation.
Asked by a reporter if there was a need for more radical disciplinary action, Temasek’s chief executive officer Dilhan Pillay said the cut in compensation was meted out due to the negative impact on Temasek’s reputation.
“When you have something which affects the reputation, that’s when you take action which might be a little bit more punitive because you want to remind yourself that every time you do something, the issue is not just a financial risk associated with the investment,” he added.
“It’s the reputation risks and we take our reputation very seriously … But if you say (to) take more action, I don’t think it will be warranted.”
Mr Pillay noted that Temasek “is in the business of taking risk” and it accepts “binary outcomes” when it does the underwriting for investments.
“We consider all the risks, the mitigation factors … and we make a judgment call,” he said.
“The question is, does the portfolio do well … (which is) ultimately a combination of different efforts in making those judgment calls … and as long as that’s the end goal and objective and we can hit it, then of course, it is alright. FTX was, I would say, an aberration.”
MAINTAIN CAUTIOUS INVESTMENT STANCE
Temasek ended the financial year in a net cash position, which will provide it with the flexibility to take advantages of opportunities ahead, said Ms Png.
That said, the global economy remains fragile amid intensified geopolitical developments such as US-China tensions and the effects of the Ukraine war. At the same time, monetary policy remains tight globally with high interest rates as inflation remains elevated.
Temasek expects global growth to slow, with recession risks looming in key developed markets, which could be “exacerbated” by shocks such as the earlier collapses in the banking sector.
Back home, the Singapore economy will contend with slowing global growth and elevated inflation.
While China’s reopening could provide some support, the Singapore economy is geared more towards domestic demand in developed markets which could experience a recession. Rising geopolitical tensions will add to the challenge, although Singapore could stand to benefit from diversification of supply chains around the region, both in the near and medium term, it said.
“We maintain a cautious investment stance and expect to invest at a moderated pace this financial year, given the challenging macroeconomic environment,” said Temasek’s chief investment officer Rohit Sipahimalani.
Still, it is ready to step up investments in a market correction on the back of a “strong” liquidity position.
“Amidst an increasingly complex and volatile backdrop, we will stay focused on investing into opportunities that align with our long term structural trends, so as to build a resilient and forward looking portfolio, as part of our T2030 strategy,” said Mr Sipahimalani.
A key pillar of this 2030 strategy is to build a resilient and forward-looking portfolio, which has two components.
The first is a “resilient” component accounting for around 60 to 70 per cent of the portfolio. This comprises Temasek’s core portfolio companies and asset management business, which are “long-term investments with stable and sustainable returns”, said Mr Pillay.
The other 30 to 40 per cent of the portfolio will be a “more dynamic” one that comprises direct investments in various focus sectors, as well as early-stage unlisted companies.
“Our focus for portfolio construction for this decade is to build a portfolio that can withstand exogenous shocks and perform through market cycles, both up and down,” Mr Pillay said.
Sustainability is also a key part of the 2030 strategy, with the investment company targeting to halve the net carbon emissions attributable to its portfolio by 2030 from its 2010 levels.
“So we have to go from 27 million tonnes of (carbon dioxide) equivalent today to 11 million tonnes … by 2030,” said Mr Pillay. “And this is not easy when you have long-term interest in power and utilities, the built environment and the aviation maritime sectors.”
It has applied an internal carbon price of US$50 per tonne of carbon dioxide equivalent and expects to increase this price progressively to US$100 by 2030.
Over the longer term, Temasek aims to reach net zero by 2050.
“As we step up efforts to encourage decarbonisation across our portfolio and continue to invest in less carbon-intensive businesses, we expect our portfolio emissions, in absolute and intensity terms, to decrease over time,” said Mr Pillay.