How A Sovereign Wealth Fund Delivered Positive Returns In A Bear Market
For the longest time, I was a non-believer of the investing philosophy of the sovereign wealth fund of my home country. However, after learning of their latest results, my views have started to somewhat shift. I found myself to become more open and receptive to the way they invest.
At a time where markets in many countries are in huge negative territory, a sovereign wealth fund in Singapore has generated positive returns for the year. This is none other than Temasek, the state-owned investment arm of the Singapore Government.
Just recently, Temasek reported that its portfolio value hit a record high of $403 billion. This gives an annualised return of 14% since inception, or a 1 year return of 5.81%.
How did Temasek post such good results, at a time when other markets are down in the dumps?
Temasek’s Aim
To build a forward-looking and resilient portfolio that delivers sustainable returns for its shareholders.
Their investment activities are aligned to four structural trends that shape their long term portfolio construction.
Temasek’s investment discipline is centered around their intrinsic value and risk-return framework. They adopt a bottom-up intrinsic value analysis, where expected returns are evaluated against a risk-adjusted cost of capital.
Bottom-up investing is an investment approach that focuses on analyzing individual stocks and placing less emphasis on macroeconomic and market cycles. Bottom-up investors focus on a specific company and its fundamentals, whereas top-down investors focus on the industry and economy.
This is consistent with my approach in investing. Focus on company fundamentals instead of the macro environment.
Portfolio Performance
Temasek’s investment philosophy is to deliver sustainable returns for shareholders. In spite of all the crisis and pandemics, the portfolio value has been steadily increasing since inception. This is a sign of a resilient portfolio, one that is able to withstand the test of time.
The portfolio has 63% exposure to Asia, with 27% coming from Singapore, and 22% from China.
Temasek’s Investment Process
1. Have an Investment Thesis
An investment thesis lays out the frameworks and scenarios that guides their investment decisions.
2. Intrinsic and risk-value factors play a key role
The intrinsic value of the company is weighed against the risks and cost of capital.
3. Good Management Team
The quality of the management, and whether the management is capable of running and executing on their business strategies. This involves visiting and talking to people located all over the world.
Structuring a Portfolio Like Temasek’s
If you’re looking to structure a similar portfolio to capture outsized returns, one way would be to use the respective country ETFs to model after the geographical coverage.
Here are some diversified broad-based ETFs that help cover the top 3 geographical regions (70%).
Singapore - SPDR Straits Times Index (STI) ETF (STI ETF) 27%
China - Xtrackers Hvst CSI 300 China A-Shs ETF (ASHR) 22%
Americas - Vanguard Total Stock Market ETF (VTI) 21%
Conclusion
The resilience and sustainability of Temasek’s investment portfolio is somewhat surprising. While it’s not feasible to replicate a like-for-like portfolio, owning the top 3 country ETFs allows us to tap into the portfolio.