Asiamoney.com: GIC doesn’t practice what it preaches

Asiamoney.com Opinion, September 29 2010

Sovereign wealth fund annual reports are always eagerly awaited, if somewhat disappointing. China Investment Corporation gives tantalising glimpses of a powerful institution but won’t disclose its target asset allocation; Temasek gives plenty of information on investment but none about the leadership conundrums of recent times. At Government of Singapore Investment Corporation, there’s welcome information on allocation, but a frustrating lack of the magic number of its overall assets.

A look at GIC’s latest report, released this week, raises some puzzling questions. GIC, the report says, has conducted a comprehensive review of investment policy. One result of this is that it will be easier for the management to move away from long-term asset allocation when it is sensible to do so, but the bigger commitment is that investments in emerging economies, especially Asia, will be increased, a process that has supposedly been underway for some time.

This makes perfect sense for a host of reasons: the hopeless state of US and European markets, with little short-term hope of relief; the outstanding dynamics in Asia, both at an economic and an investment level; the familiarity with nearby markets and cultures; the availability of pre-IPO investment, particularly in resources companies. On that piece of strategy, we’re sold.

There’s just one problem: it isn’t actually happening.

GIC, unsurprisingly, showed a dramatic shift towards public equities over the last 12 months, as it regained risk appetite and positioned itself for the market rebound after the financial crisis, and as the value of its existing equity holdings grew. So the move from 38% to 51% is not particularly surprising.

What is surprising, though, is that absolutely all of that increase came in developed market equities. The emerging market contribution – 10% – didn’t move. The Americas account for 43% of GIC’s investments, and Europe – in an increase from last year – 30%. The UK and France between them account for exactly the same proportion of the portfolio as the whole of ex-Japan Asia, at 13%.

Contrast that with Temasek which is moving towards a 40:30:20:10 split between Asia, Singapore, OECD countries and others (chiefly Latin America so far). Temasek has its critics but it puts its money where its mouth is: just one fifth of the portfolio in the developed world because it perceives the greatest opportunities are in the region which it also happens to know better than any other.

GIC’s a curious place. Fund managers describe it, along with ADIA in Abu Dhabi, as the most sophisticated of sovereign wealth funds, with outstanding expertise internally among its 1000-strong staff. Many recount turning up to pitch a flash new idea to GIC only to find that the fund has been doing it internally for years anyway. It has built a real estate division that is, in its own right, one of the largest in the world (the spin-off of its Chinese and Japanese logistics assets next month may yet be the largest ever Singapore IPO); it also houses one of the smartest and connected alternative investment businesses in the region, if not the world. Yet its long-term return, at an average of 7.1% a year over the last 20 years in US dollar terms, or 3.8% over global inflation, is not actually all that amazing and, barring last year’s crisis-hit number, has been drifting for a decade. Maybe by doing what it says it will, and looking for opportunity closer to home, it can arrest that drift.

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So Stuart Gulliver will be the next CEO of HSBC. Many who recall his time as head of treasury and capital markets in Hong Kong will have seen this coming for a decade: he always had the gravitas to be a candidate. And he will, it seems, be back, following Michael Geoghegan’s example to run the company from its spiritual home in Hong Kong.

When he gets here, what will we see? Gulliver is taking on a bank which has, for the second crisis in a row, emerged stronger by comparison with its peers. HSBC had its brush with US sub-prime in an uncharacteristic duff move. But by comparison with any global peer bar Standard Chartered, it emerged from the global financial crisis galvanised and vindicated, the stoic prudence that has long characterised the place once more being proven appropriate.

But it’s significant to see an investment banking man promoted to the top job (it’s interesting that both HSBC and Barclays put investment banking people in charge of their entire banks within a week of one another, barely 18 months after investment banks came close to wrecking the global financial system). So one wonders whether, when he gets back, he might finally correct a glaring omission in the HSBC product set and get it to take investment banking more seriously in Asia.

Not the debt side: there’s no problem there. According to Dealogic, Asia is second in Asia ex-Japan G3 debt capital markets so far this year, having also been second in 2009 and the leader in 2008. On the local currency side the top positions these days inevitably go to the mainland Chinese houses, but of the foreigners only Stanchart has beaten it in Asia so far this year.

But look at equity capital markets. Where’s HSBC? 32^nd in the region, year to date. That’s not a blip, either: it was 29^th last year, 26^th the year before. And what about M&A? For announced M&A in Asia ex-Japan, Dealogic ranks it 10^th so far this year, which is at least an improvement on the 33^rd place it occupied in 2008. No question, there’s plenty else that HSBC gets right, and in an era of emerging offshore RMB bond markets perhaps it’s right to focus resources on the debt side. But it’s an odd gap, and maybe one that Gulliver will correct when he relocates back to Queen’s Road Central at the end of the year.