In Parliament on Friday (7 Mar), Senior Minister of State for Finance Josephine Teo said that any rise in Singapore’s spending needs over time should not drive GIC and Temasek to take on more risks.
The solution lies in the government’s budgetary measures, rather than a change in these entities’ investment strategies, she told the House.
Under the current Net Investment Returns (NIR) framework, the government can tap up to 50% of the long-term expected real return from the net assets managed by GIC and the MAS for its budgetary spending,
GIC and Temasek “must continue to invest with the aim of achieving good, risk-adjusted returns over the long term”, which they have achieved so far, she said.
Ms Teo was responding to Ang Mo Kio GRC MP Inderjit Singh, who was concerned that the government may be spending too much from its investment returns.
Even so, some of GIC and Temasek’s investment losses in recent years appear to suggest that both entities may have been taking a lot more risk than Ms Teo is willing to admit.
In late 2007, GIC invested a massive 11 billion Swiss francs (then S$14 billion) – GIC’s largest investment ever – for a major stake in UBS [Link]. According to Reuters, GIC’s investment in UBS was later converted to UBS shares at 47.7 Swiss francs, making GIC the largest shareholder of UBS at 6.6% of equity [Link].
Based on Friday’s (7 Mar) closing price for UBS shares of 18.63 Swiss francs, GIC has lost some 61% or S$8.5 billion.
UBS share price in Swiss francs (CHF):
In its defence, GIC says on its website [Link]:
For UBS, as we said in late 2008, our timing could have been better and the investment is still finding its footing. GIC’s view of UBS’ fundamental strength as a well-capitalised bank with a strong private wealth management franchise remains unchanged.
GIC manages risk by investing in a well-diversified portfolio, with a balanced distribution of asset classes and their underlying business sectors and geographies. This, too, is why GIC’s performance has to be measured on the basis of its overall portfolio rather than by how much it makes or loses on individual investments.
In 2006, at the height of the US real estate bubble, GIC made a US$675 million investment – comprising US$100 million in equity and US$575 million in loans – in the Stuyvesant Town/Peter Cooper Village complex in Manhatten, New York. The management of the complex, Tishman Speyer Properties and BlackRock Realty, defaulted on their loan in 2010. GIC then booked a loss on the US$675 million investment, as reported by Reuters [Link].
Reuters said, “GIC did not disclose its exposure or say how much it wrote off, although court documents indicate the Singapore fund held $100 million of equity and $575 million in mezzanine debt issued by the owner of the Stuyvesant Town/Peter Cooper Village complex in Manhatten.”
What about Temasek? Let us see how Temasek made some of its investments.
In May 2007, Temasek bought 55 million shares of ABC Learning at A$7.30 a share for a 12% stake. The investment cost Temasek A$402 million. As the share price fell in early 2008, it bought more shares and increased its stake to 14.7%, making it the second largest shareholder in ABC Learning [Link]. Then a series of events happened:
- An unexpected drop of 42 per cent in profit in the second half of 2007 to $37.1 million and its inability to service its $1.8 billion debt triggered a decline in the company’s share price. Several directors of the company were forced to dump millions of shares after receiving margin calls in February 2008 [Link].
- In August 2008, shares of ABC Learning were halted from trade when the company failed to release its latest earnings [Link].
- In November 2008, the company went into receivership. An estimated A$850 million was owed to its banks. Shareholders would not receive anything, the Sydney Morning Herald reported [Link].
- By April 2009, it was announced that some of the ABC Learning centres were sold to charity, Mission Australia, for $1 each [Link]. Mission Australia spokesman Paul Andrews told the Australian media, “We got a really fantastic deal.”
In less than 1.5 years from the day Temasek invested in ABC Learning, it was game-over for Temasek.
In May 2009, Financial Times (FT) reported [Link] that Temasek had pulled out of its investment in Bank of America, selling its 3.8 per cent stake in the US group. Temasek is estimated to have lost at least US$2 billion on an investment foray that began with it taking a stake in Merrill Lynch in December 2007 for US$5 billion. The Merrill Lynch shares were later converted to Bank of America shares after Merrill Lynch merged with Bank of America. Temasek did not disclose when it disposed of the Bank of America stake or at what price, FT said.
Are GIC and Temasek already taking a lot more risk than Josephine Teo has assured the House?
What do you think?