Singapore: Will Temasek change tack?

Euromoney, March 2009

Temasek’s decision to replace Ho Ching with Chip Goodyear as CEO raises a host of questions about the future direction of Singapore’s sovereign wealth fund.

The first is whether the change signals a greater degree of independence for the S$185 billion fund from Singapore itself. Temasek’s top brass has always claimed the fund has been run entirely independently; in an interview with Euromoney last year Temasek’s executive director, Simon Israel, put it like this. “I find it interesting to apply to people the Singapore Stock Exchange test of independence: independence of mind and judgement,” he said. “If you looked at any member of the Temasek board, every one of them has a completely independent mind and sense of judgement, and a very strong set of principles that would never accept the government interfering in the business. Frankly it is almost a parallel to what it would be if we were a listed company.”

But be that as it may, it has never helped Temasek’s image that Ho Ching is the wife of the prime minister, Lee Hsien Loong. Whatever levels of transparency or good governance Temasek has been able to boast – and it is among the better sovereign wealth funds in that regard – it simply hasn’t looked good to have someone who is married into the ruling family as the head of the state’s investment vehicle. When Temasek has struggled for political reasons in its purchases – the obvious example being Shin Corp in Thailand – Ho’s presence has almost certainly not been helpful. Putting Goodyear, an American, at the helm certainly improves the perception of independence even if it makes no difference in practice.

And why would Temasek suddenly care about that? It’s useful to see the move in the broader context of attitudes to sovereign wealth funds generally. This issue has gone on the back burner  somewhat with the global financial crisis, but in recent years there have been calls in the US and Europe for much closer supervision of the behaviour of sovereign funds. This sentiment is chiefly targeted at the Gulf, and in the last two years Temasek has made a notable effort to differentiate itself from Middle Eastern sovereign funds, in terms of governance, commercial orientation, transparency and source of funds. The hope is that, when more onerous regulation comes along, regulators will distinguish between the opaque funds and the open ones. In this respect, perception is important, and a clearly independent American CEO helps Temasek’s case when it tries to position itself for greater regulation of sovereign funds generally.

The other big question is just what Goodyear’s appointment says about Temasek’s likely investment direction in future. It’s no secret that Temasek has been top-heavy with financial holdings: as of March 31 2008, 40% of the portfolio was in financials, though one imagines this has shrunk considerably as the value of those holdings has plunged. The most well-known bad investment was the $4.4 billion investment in Merrill Lynch at $48 a share in December 2007; at the time of writing those stocks (now in Bank of America shares) would be worth just over $4 apiece. Temasek did get the overall investment cost revised considerably downwards to around $24 a share following a well-placed covenant that kicked in when Merrill raised further capital in July, but that compensation went straight back into Merrill along with an additional US$900 million. Even after subsequent rumoured sales Temasek is believed to be facing a paper loss of more than $2 billion on Merrill alone. Its stake in Barclays has fared equally badly. Other financial holdings include stakes in Standard Chartered and numerous Chinese, Indian, Indonesian and Korean banks.

Goodyear does have a background in financial services from his days at Kidder Peabody, but he is best known to the world for his time as CEO of BHP Billiton in Australia. During his tenure there he didn’t put a foot wrong: it was a good business, in a commodity boom, run well. Cynics say anyone could have run a company like that in such a boom, but it is telling that BHP is holding up well in the downturn thanks in large part to balance sheet strength and portfolio diversification put in place by Goodyear. And since energy and resources only accounted for 5% of Temasek’s holdings in March 2008, it is very likely this experience that appealed to the board. “There is widespread expectation that we will now see Temasek start making more investments in resource assets,” says a fund manager in Singapore.