Temasek Holdings (Temasek), one of the two managers of Singapore’s state funds other than GIC, is often looked upon as the beacon of light by the investing community as many of its strategic moves are often proven to be well thought out and appropriate. After the sovereign fund manager reviewed its performances for the financial year ending 31 March 2019 recently, we picked up 5 critical lessons from the way Temasek managed its portfolio that may be able to help in boosting our very own investment returns.

Areas Of Focus

Identifying consumers’ longer lifespans, rising affluence and technology enablers as the trends of tomorrow, Temasek is actively seeking growth opportunities in related businesses. As at 31 March 2019, the top three sectors which took out the largest portions of the group’s portfolio were financial services, telecommunications, media and technology as well as consumer and real estate which accounted for 25 percent, 20 percent and 17 percent respectively.

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Source: Temasek Holdings

In particular, Temasek has been paying special attention to non-bank fintech such as Ant Financial as well as online platforms including food delivery services and ride-hailing companies. Concurrently, the group has also raised its exposure to the life sciences sector through an increased investment in companies that support innovative drugs development and gene therapy for rare diseases.

Buying Into Private Assets

On the back of a lot more capital looking for yield, Temasek acknowledged that valuations remain elevated currently. Hence, the group is also turning to unlisted assets to seek better returns. To-date, Temasek has increased its investments in the private markets with an exposure to these unlisted assets making up around 42 percent of its total portfolio. This has jumped significantly from just approximately 33 percent in 2015. In spite of this, the group guided that it expects allocation towards alternatives, private equity and venture capital to continue to climb in the next few years while the proportion of unlisted assets to grow in tandem as well. Some of the notable unlisted assets which Temasek currently held in its portfolio include Mapletree Investment, Singapore Power and PSA.

Diversification Is Key

While Singapore used to be the area where Temasek has the greatest exposure to at 29 percent in 2017, this is no longer the case last year. In a bid to build resilience in its portfolio as well as to capture growth outside of Asia, Temasek has attempted to plough more seeds into other markets that promise better returns. As at 31 March 2019, the group’s portfolio exposure to the Singapore region shrank to around 26 percent with increased stakes in China, North America, Asia and Europe regions.

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Source: Temasek Holdings

Net Seller For The Year

During the last financial year, Temasek was effectively an overall net seller as it divested $28 billion of assets while investing about $24 billion in the same period. Key divestments included Gilead Sciences, Cargill Tropical Palm and Klabin. Meanwhile, the group has also shed some interests in Alibaba, CenturyLink and HIS Markit as it rebalanced its portfolio. Given the weak market outlook, Temasek remarked that it may continue to slow its investment pace over the next nine to 18 months.

Investing For The Long Term

Last year, Temasek posted a dismal 1.5 percent one-year total shareholder return, which is rather disappointing in comparison to the 12.2 percent return attained a year ago. However, if we were to take a step back and looked at the bigger picture, Temasek still managed to achieve a remarkable annualised return of 15 percent compounded over 45 years since its inception in 1974. To be sure, Temasek’s returns surpassed its 20-year risk-adjusted cost of capital aggregated across its investments of 9 percent, by a wide margin.

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Source: Temasek Holdings

Furthermore, Temasek’s net portfolio value reached a record $313 billion for the year ended 31 March 2019, rising 1.6 percent from $308 billion registered a year ago despite a weaker year-on-year growth. On top of that, the group received dividend income of $9 billion from its portfolio which may be re-invested back for higher returns. Overall we feel that the fund manager has not fared too badly amid the subdued markets, especially from a longer-term perspective.

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