FT BeyondBrics: Temasek overweight in Australia, NZ and China – not the US or EU

FT BeyondBrics, July 4 2013

The headlines on Temasek’s annual review, published on Thursday, will likely focus on the 8.86 per cent one-year return and the tripling of the portfolio’s value in 10 years to S$215bn.

But the interesting long-term story at the Singapore state investment company lies in the its asset allocations.

Ten years ago, 85 per cent of Temasek’s exposure was either in Singapore or OECD economies. This made little sense: not only were the greatest growth opportunities to be found in developing Asia and elsewhere in the emerging world, but these were also the locations that Temasek knew best.

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So it shifted to a target allocation of 40:30:20:10, representing Asia, Singapore, OECD countries, and others, such as Latin America and Africa, respectively. It moved swiftly, and by 2009 it was most of the way to that target allocation. On March 31 2013, the figures stood at 41:30:25:4.

Looking a little deeper, though, reveals some interesting patterns. One is the sheer scale of the fund’s commitment to China, which on its own represents 23 per cent of the assets – almost twice as much as North America and Europe put together (12 per cent). China Construction Bank alone is 8 per cent of the fund, and Temasek bought or increased stakes in ICBC and Ping An during the financial year.

Another is the surprising composition of Temasek’s OECD exposure. One might expect this to be dominated by North American and European holdings, but in fact allocations to Australia and New Zealand are, at 13 per cent, more than the bigger two developed regions combined.

A third issue is that byh far the largest degree underweighting compared to the target allocation is what we might call ‘other’: 2 per cent in Latin America and 2 per cent in Africa, Central Asia and the Middle East, well below the 10 per cent target for these regions.

This is interesting since Temasek had appeared to make Latin America something of a priority in recent years, opening offices in Mexico City and Sao Paolo, and relocating some very senior staff – such as veteran Temasek manager Alan Thompson to Brazil in 2008 – to those cities.

What should we make of these decisions? Temasek, naturally, is in business for the long term, but in today’s climate some of these allocations look smarter than others. One might argue, for example, that this has been a bad year to be increasing stakes in China, and in particular in Chinese financial services; then again, Chinese stocks have been at historically low levels, and most of Temasek’s exposure is in listed securities.

On the other hand, holding back on deployment into Latin America and frontier markets looks like a smart judgment if one believes that the momentum is with developed world markets for the foreseeable future, and Temasek does appear to have taken that view.

CEO Ho Ching said on Thursday: “While Asia and Latin America will continue to be focus areas for us, we do see increasing opportunities in North America and Europe.” She said the fund was setting up new offices in London and New York to support investment there.

Several years after being badly burned by its stakes in Merrill Lynch and Barclays – buying on the way down, selling near the bottom – Temasek appears to have rediscovered some appetite for the developed world. It was notable, for example, that Temasek’s $4bn of investments in energy and resources during its financial year were heavily dominated by developed world companies, even if they had emerging market assets: Repsol (Spain), Cheniere Energy (US), Venari Resources (US) and Turquoise Hill Resources (Canada).

A broader point is that Temasek, uniquely among sovereign wealth entities, is almost entirely invested in equities. The Qatar Investment Authority is the one that gets the reputation for a lack of asset diversity in its portfolio, and for bold and brash direct investments in overseas assets. But Temasek is still less diversified by asset class.

In this respect it looks nothing like its Singapore peer, the Government of Singapore Investment Corporation (GIC), which publishes clearly-defined asset allocation bands and is considered one of the world’s foremost authorities on alternative assets.

With equities come volatility; with Chinese equities come even more volatility, and it is worth asking whether the interests of a state investment entity would be better served with some debt and alternative exposure in order to smooth out returns.

Temasek faces other challenges; even after a significant divestment last year, SingTel represents 14 per cent of the portfolio, which looks top-heavy for such a diversified fund.

That’s a legacy of Temasek’s original role as a vehicle which owned post-privatisation state holdings in Singapore blue chips, just as Australia’s Future Fund has been both helped and hindered by a legacy holding in Telstra. But things like that can be worked out over time.

Shifting from a pure equity model would require a major restructuring, which seems highly unlikely, so Temasek will be stuck with the volatility that comes from having a quarter of your holdings in the roller coaster markets of China.