12 July 2006

Sad Performance

ST July 12, 2006
GIC sees 9.5% annual return over 25 years
By Bryan Lee

SINGAPORE has revealed for the first time how the investments of its financial reserves have performed.

On average, a return of 9.5 per cent in US dollars was made each year for the past 25 years. In Singapore dollars, the yearly return was 8.2 per cent.

In real terms, after working in global inflation, the rate works out to 5.3 per cent. These figures on the performance of the Government of Singapore Investment Corporation (GIC) up to March 2006 were made public yesterday by Minister Mentor Lee Kuan Yew.

Describing the results as 'good' he said they show that the GIC has fulfilled its mandate of preserving the international purchasing power of Singapore's reserves. 'Indeed, the GIC has significantly enhanced the value of our savings,' he added.

MM Lee, who has been GIC chairman since its inception in 1981, was speaking at its 25th anniversary dinner at the Ritz Carlton hotel, attended by about 750 of its staff and directors as well as former employees.
Gasp ... This is shocking. 8.2 per cent returns p.a. over 25 years? That is a dismal performance. No wonder they have been so secretive all these years.

I doubt if the local press will tell you that. But anyone who knows anything about investing knows that it is a very fair statement to say that GIC's performance is dismal. Well, I shan't say more. In a few days' time, we'll check again and see what the international press has to say.

"Gosh ... they get all that CPF money rolling in
every month from all the working citizens of Singapore ...
and they still perform about 3 times worse than me!"
- Warren Buffett.

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Josee said...

You got it wrong. It is 8.2% per year... not 8.2% over 25 years.

Anonymous said...

This is an averaged figure?

Using a 25-year time frame is rather clever.

I believe most investors lost quite a bit (probably 30%?, judging by market performance and share prices) during the recent (5 year frame) meltdown worldwide.

But, 8.2% annual return does seem paltry especially as it had straddled across a high economic growth period before 2000?

Perhaps, we went into the wrong markets.

Eric said...

I think you have misread the article. The article states that the yearly return was on average 8.2% for 25 years, not 8.2% over 25 years. To find the approximate return over 25 years, one would have to compound the 8.2% rate over 25 years which will be a bigger number than 8.2%.

Dr Oz bloke said...

From January 1926 through March 2006 the annualized total return for the S&P 500 was 10.46% per year up from the annualized 10.44% rate in December 2005. The dividend component consists of 40.97% of the return, down from the 41.16% value at December 2005.


Dr Oz bloke said...

So Eric, whether or not it is per year or not....assuming it is per year, that still shows that the GIC underperformed the S&P 500 index.

We might as well just park the reserves in Vanguard's S&P 500 passively managed index fund.

Save on all those multimillion dollar salaries.

Anonymous said...

8.2% is pretty poor considering the enormous principalling and market risks GIC takes off shore. I'm even more puzzled since they are 40% invested in the US, and the US have been experiencing strong economic growth for the last 30 years.

Eric said...

Dr Oz Bloke,

Well words have meanings so I just wanted to be clear about the meaning of what was written. Anyway, you have to compare returns from the same period, which you haven't so you haven't shown that there was underperformance.

yh said...

i thought it's not too bad.
not many fund manager can outperform the market in the long run.

pales in comparison with the master, however:


Anonymous said...

Let's put it this way. Peter Lynch's Magellan fund returned 29.2% on annualized return, over 13 years.

Okay we cannot expect GIC to be as good as Peter Lynch. But can we expect GIC to be about half as good as Peter Lynch? Surely that is reasonable.

I would like to see GIC achieving something like 14% or 15% then. Certainly not 8% or 9%.

John Riemann Soong said...

1997 and 2000 bursts, perhaps?

With 8.2% per year 25 years, that is equal to 1.082 to the power of 25, or 7.17268105.

Is a seven-fold return considered "good" for 25 years? It seems quite okay to me.

John Riemann Soong said...

Well accounting for inflation (1.052^25), that puts it at 3.55?

I would be pretty happy if I got 3 times the return on the principal you know! Even for a quarter of a century. But that's just me. I have no idea what the standard is.

Anonymous said...

It's not fantastic returns given the amount of principal that GIC has at its disposal.

In addition, GIC also goes into private equity (unquoted shares in companies), bonds, real estate. Some of these e.g. private equity should have higher returns that listed equities as the risks are higher. 8.2% annualised over 25 years is not very good considering that GIC is paying top dollar for "talent".

hugewhaleshark said...

The first thing that I thought when I heard the 9.5/8.2% number was that it does not really tell me much. To make complete sense of the number, I need to know what GIC invested in, and in what proportions.

As Dr Oz pointed out, the 9.5/8.2% return underperforms the S&P500. But that is a relevant bechmark only if the funds were 100% invested in US equities. This is probably not so.

If a large part of the funds are invested in treasuries, say, the expected return will be less. Correspondingly, 9.5/8.2% will be a better result in comparison. The reverse will be true if GIC invested large portions of the funds in higher-risk or leveraged assets like private equity, real estate, hedge funds or derivatives.

If we know how much GIC invested in each asset class & geography, we can then create an appropriate benchmark of average market returns from a similar asset mix. Only then will we be able to see whether GIC has out or underperformed this benchmark.

In the asset management business, we also talk about tracking error and information ratios, which are basically measures of how much risk a fund is taking by deviating away from its intended benchmark, and how much it is getting rewarded for taking that risk.

All these need to be taken into account in evaluating any fund manager's performance, including GIC.

The corollary to these points which I am making is this - GIC has rather unusual return targets - to deliver returns in excess of the inflation rates in the US, Germany and Japan. It is more normal for fund managers to declare that they intend to deliver returns in excess of a certain benchmark of market returns, as discussed before.

Anonymous said...

John, the return is pathetic.

As a retail client, if you go to an independent financial adviser in Singapore, they will usually tell you that their target is to deliver around 8% or 9% returns to you, on an annualised basis.

In other words, the returns that GIC is getting is just approximately equal to the returns that the averahe financial advisory firm in Singapore aims to deliver to its ordinary clients, including the HDB auntie, the HDB uncle etc.

Bear in mind that when you're as big as GIC, you already enjoy huge advantages over the HDB auntie. You won't have to pay 5% sales charge for your unit trusts, that's for sure. Now, when you enjoy all those advantages, and all you get is what the HDB auntie aims to get for herself, well, that's ...... pathetic.

I do not know if you know this, but there were many years in that 25-year period when you could have gotten 6% interest just by putting your money in a no-brainer FIXED DEPOSIT with Hong Leong finance.

Dr Oz bloke said...

What I find more shocking is the statement that GIC invests in high risks investment vehicles that are EXPECTED to give HIGHER returns over the long term!

Any fund managers out there want to comment? Is there really such a thing?

Well the final figure of 8.5%/9.5% annual returns that the GIC gets with such a strategy throws some light on the fallicy of that statement.

Anonymous said...

I think there is a misconception in comparing the value of our reserves now (US$100 billion) to what they were in 1981 (reported by the ST as several billion dollars).

Of course it would look good that our reserves have grown by a few fold (somebody here mentioned 3.6 times). I hope that's not how the 8.2% per annum was actually arrived at.

That's because for each of the last 25 years, we have been like clockwork adding to our reserves through our current account surpluses (which from basic economics is equivalent to the excess of domestic savings over domestic investment spending). Domestic savings of course cover government operating budget surpluses; private household savings and corporate retained earnngs; and - I do believe this accounts for a very large proportion - our mandatory CPF savings.

What this means is that our reserves base (or principal if you want to call it that way) has been growing on auto-pilot for each of the last 25 years.

Mind you, considering the fact that interest rates in Singapore have traditionally been low and the interest on the CPF ordinary account is set at 2.5%, government (i.e GIC and Temasek) doesn't really have to strive to earn a very high return from its overseas investments in order to cover the interest on the funds borrowed from the CPF accounts. (Another way of looking at it is saying that the opportunity cost of capital for the government is actually pretty low).

But if the 8.2% figure is calculated as the average of the ANNUAL returns for each of the last 25 years, then perhaps it's not too bad.

Like everyone else, GIC has its good years and bad years. If it was a good investor, it would have had more good years than bad years and the bad years are not that bad. But then, we wouldn't ever know which years are good and which years are bad, would we?

moomooman said...

I think to compare with GIC's performance with S&P 500 may not be a fair comparison.

GIC still works within a government framework that is very different from other companies... like they pay 40% more salary. haha.

Anyway... the bigger underlying question is....

How come CPF still only earns 2.5% while fixed-Deposits are already offering 3%? Isn't Fixed-D more safe than Singapore bonds?

Also MM Lee decided to make a point with regards to CPF, because he doesn't want us to make question like what I just did.

Dr Oz bloke said...

I'm just wondering whether you guys understand what the S&P 500 index is?

It's just an index. It's not actively managed.

It's an index. Just like DJIA, STI etc....no need to pay anyone much to just do an index you know...

Confused said...

I think it's not a very worthwhile exercise judging whether the 8.2% represents a 'good' return as there is insufficient insight into the numbers and it is also not clear whether any industry 'benchmarkable' method was used.

I am in particular curious as to whether the 8.2% is an average, or 'mean' number, or rather a compounded annual growth rate number (CAGR). To illustrate the difference, see the following example:

Year 0 (initial investment): $100
Year 1: 150 (+50%)
Year 2: 135 (-10%)
Year 3: 135 (0%)

The 'mean' return would then be (50%-10%+0%)/3 = 13%

The CAGR, however, would be 135/100^(1/3)-1 = 10.5%

The mean methodology as can be seen, is subject to year-by-year variations more than the CAGR. I'd hope that GIC was using the CAGR. 8.2% then would be reasonable to me, subject to the riskiness of assets invested in.

In addition, as another reader has raised, how are the annual inflows accounted for? I'd assume there is a fairly standard way of doing this since the AM industry has to handle it regularly. I would assume that GIC has stripped out the effect of its automatic annual cash injections and that the 8.2% are purely returns.


Spamme said...

PLEASE PEOPLE! 8.5% increase per YEAR is pathetic given the size and amount of resource that GIC have.
There are trust funds that any tom dick harry can buy off the market (non-local) that gets you that much per year.

For example, Warren Buffett's Berkshire Hathaway average 25% PER YEAR over the last 25 years


While obviously we do not expect our GIC to match them dispite the premium that we pay for so called "talents" and our dear minister of finance, it is pathatic that GIC only managed to achieve 33% of that.


tee said...

basically, i would just say that 8.2% is pretty very much AVERAGE. To be fair, the larger the amount of money involved, the harder it is to outperform the market, since there are many investments that they NEED to overlook because of its relatively insignificant size, as compared to an average individual which it's indeed worthwhile to make such an example.

To give an example, after much effort, you may find a $1m dollar that can return you 25% per annum. But to the GIC with $100b to dispose of, spend such an amount of effort to find such an investment is simply NOT worth the time, since it makes little difference to their overall investment result anyway.

This limitation of having a very large funds, are actualy highlighted by Warren Buffett and Peter Lynch. Even Peter Lynch himself revealed that a small amateur investor can have an advantage over a fund manger because of this effect.

Hope to clear some air over the assumption that big players are superior to small players.

P.S. I'm not pro-PAP. :)

tee said...

to those people who give a comparison of GIC's performance, against Warren Buffett's performance, I would say that Buffett's unleveraged performance over the last 10 years is quite stagnant.

However, one better measure of GIC's performance would be to take account of the amount of leverage they used. If the result is achieved together with significant leverage, then indeed, GIC's performance is pathetic.

tee said...

to correct a typo,

the very last word in the 1st paragraph of my first post should be 'investment', not 'example'.

hugewhaleshark said...

Ah, yes. The question really is what the hell they are doing with the money and how much risk they are taking. Only if we know the answers to these questions can we say whether the return is adequate.

Tony Tan gives some indications: half of GIC's portfolio consists of equity investments, while bonds account for 30% and the remainder is made up of private equity, hedge funds, real estate and commodities. The share of its investments in the US is 40-45%, while 20-25% is invested in Europe, 8-10% in Japan and the rest in emerging markets.

My gut feel is that 9.5% in USD terms is a pretty fair result, with the bonds portion, and possibly investments in Japan dragging down the overall return.

Jolly Jester said...

From a pure equities portfolio point of view, 8.2% per year is really average. But there are a few considerations when gauging GIC's performance.

1. What asset classes are they invested in? Given that its the reserves, I would think that there should be quite a proportion invested in low risk, low return assets(like treasuries/bonds). I would think they are invested in property as well. Any futures/options?

2. Leverage: As other commentors have pointed out, the use of leverage can increase gains greatly, as well as the risk.

3. I would agree that an extremely large fund that the GIC is managing is a big problem as most high returns options(like small cap stocks etc) are too small for them to look at.

4. Another question I have in my mind when reading the figures is: Is this 8.2% the gross return? Or is it after reducing the whole staffing and running costs of GIC? If it is net return, what is the gross return. People who have financial knowledge will know how management fees for funds can make a great difference to your net return. If 8.2 is gross return then I will have to say GIC is seriously underperforming for their "fees".

moomooman said...

If only GIC invested all their money in HDB flats.

The same HDB flat prices 25 years ago and now... surely would have been more than 8% increase p.a, Singapore dollar.

Also... can someone explain to me what is the difference between 8% p.a Sing dollar vs 9% p.a US dollar?

I would think both figures should be the same regardless what denomination you use.

Jolly Jester said...

Moomooman, the difference btwn the returns in USD and SGD is due to the weaker USD to SGD exchange rate. The USD has been weakening in recent years.

If say the exchange rates ten years ago was(theoretical eg) 1 USD = 2 SGD, and you invested 1000USD denominated asset(2000SGD) and at the end of ten years, your asset is worth 2000USD, so its a 100% gain over 10 yrs. But if the USD weakened to 1 USD = 1 SGD in the 10 yrs, what is your 100% return(in USD) worth in SGD? Its still 2000SGD, so its 0% return.

Hope it explains the difference between the 2 rate of returns

Jolly Jester said...

I don't subscribe to ST, but after reading the Business Times report I am slightly clearer about the issue as compared to the ST that mr wang quoted.

To quote from the BT article, the original aim of GIC was foreign reserves:
"Set up in 1981 with assets of $6.4 billion to manage Singapore's growing foreign reserves, GIC"

For those who have no grounding in econs/finance, the purpose of foreign reserves is mainly to act as a backing to support the country's currency value. One of the main reasons why Singapore's currency did not crash like the thai baht/indonesian rupiah was that Singapore had a very large foreign reserve that can be used to support the SGD's value.

As the name implies, foreign reserves means that the investments GIC invests in MUST be in foreign currency and not SGD, so HDB flats, singapore stocks are out of the picture.

And to quote the BT article which provided some basis of comparison: "Economists and fund managers said GIC's return looks strong compared with other state investors, given its conservative approach, according to a Reuters report.

'We don't know what the risk composition of the portfolio is, but a 9.5 per cent average annual return is pretty good. The return is about double of those seen in other central banks,' Citigroup economist Chua Hak Bin was quoted as saying."

So perhaps the benchmark is not the S&P500, but rather other central banks. I would like to read the reuters report in full if someone can find it too haha.

I guess GIC has another constraint that other funds do not have, and that is to have liquidity, as to defend a run on a currency you would need to be able to utilise your reserves quickly.

tsw said...

i think a fairer comparison would be to compare with other similar state investment vehicles.

i would also think that GIC has two main objectives in this order:

1) to protect its assets
2) to grow its assets

keep in mind that being overly aggressive comes with a greater exposure to risk as well.

of course in retrospect there certainly could have been better investment options. the returns are not stellar but they are decent. not bad at all, but could be much, much better.

simplesandra said...

Well, they can throw us any figure they want and no one can dispute it. It's not like they open their books to any independent audit. :)

Anonymous said...

Yes agree with simplesandra. The figures are pretty much meaningless without being audited and scrutinised. And we are supposed to just accept their words on blind faith. LOL

Eric said...

Here are some numbers as a benchmark: over the past 25 years, the average yearly return based on the S&P index is 9.3%. Based on the Dow Jones it is 10.3%.

The 9.5% figure cited beats one index by a little, underperforms the other by a little. I don't see what is so shocking or dismal, Mr. Wang.

John Riemann Soong said...

I'm not sure why our government should be making such specific investment choices. The duties of a central bank are generally supposed to be regulatory, ie. encouraging other investments through interest rates and loans, but not making the investments themselves generally. Hamilton would be most appalled.

Anonymous said...


That shows you are as outstanding an investor as GIC! All you have to do is sign a GIRO form, buy Infinity S&P 500 Fund every month, and over the next 25 years, you'll beat all the foreign talents that Lee Kuan Yew has handpicked!!!

Eric said...

Mr. Wang

I see that you changed your post to "8.2 per cent returns p.a. over 25 years" from "8.2 per cent returns over 25 years." I think that you should say why you did so.

Did you think that the return really was 8.2% over 25 years? In that case, your criticism is misleading since you misquoted the article. If you left out "p.a." inadvertently, then I believe your analysis is wrong given that GIC's returns are similar to the market return for the past 25 years. (See my previous comment for the figures.)

Unless you tell me differently, I assume that you misquoted the article because I don't see why the international press would be interested in the fact that the GIC has matched the historical market return. I can only conclude that you edited your post to include "p.a." so that it appears that your criticism could be reasonable without admitting that you made a mistake.

Anonymous said...

if indeed GIC investments are any indication, only the rich and select elite will benefit...thus widening the income disparity.

Mr Wang Says So said...

Haha, no Eric, I did not think it was 8.25% non-annualised. Over 25 years, that is so small they get superior returns putting it in POSB.

I corrected my post & added "p.a" because Josee had pointed out that my phrasing was not accurate.

But seriously, Eric, I'm surprised that you seem happy with GIC's performance just barely touching US S&P 500.

GIC has access to non-public info; all the principal it needs; plenty of bargaining power; political clout as well; it doesn't need to limit itself to equities and bonds even (it will have access to all other asset classes)

and all it achieved was what you or I or any other retail investor could have achieved by buying ETFs or a passive index fund.

You don't think that's sad? I do.

BW said...

"The figures are pretty much meaningless without being audited and scrutinised."

Pretty much sums it up. There're more questions than answers.

Still, remember that the average yield of a US 30year T bond over the past 25 years was around 8.3%. So how much higher returns did GIC achieve for all the investment savvy they claim to possess?

And didn't LKY say GIC fulfilled their mandate of 'preserving the international
purchasing power' of our reserves? Such a modest aim. In that case, wouldn't
it be simpler to just purchase inflation- indexed T bonds and save on the operational costs?

The bigger question for me is the phenomena of our ballooning foreign reserves and what benefits that has brought to us?

I don't buy the argument that we need an ever larger amount to deter speculators, and the last I checked, our exports exceed our imports by S$55b per annum. That is over a quarter of our GDP. It's an extraordinarily large amount. The other dragon economies like Korea, Taiwan,HK have surpluses that average 5-6%.

The ultimate aim of economic life is surely not to export, but import. Would you like to work all your life without consuming the fruits of your labour?

Where are the fruits of labour indeed, when there exists such an enormous disparity in our income distribution, with wealth accrued to the few while a quarter of households earn less than the median income of just $3,800 (that is a commonly used definition of poverty)

Ah mr Brown, Sporeans are fed up with progress.

p.s. and I wish the dept of stats would release income figures for citizens as well, not just for Spore residents.

Anonymous said...

The performance is at best ... average.

But I think Singaporeans would be justified in expecting something more than average, because what has been done to them (the compulsory deduction of 20% - 25% of their monthly salary for the past 25 years) is certainly not an "average" or "routine" kind of measure.

Anonymous said...

Actually, fellow commentators, I believe the riddle has been solved.

Rereading the ST report, it says something to the effect "from a fund size of $10 billion in 1981, ... total managed assets has grown to over US$100 billion".

From $10 billion to $100 billion over 25 years implies a compounded annual growth rate of 9.6% per annum, which is pretty close to the 9.5% figure cited in US dollars. The lower 8.2% figure in Singapore dollars is because the Sing dollar has appreciated against the US dollar over this period i.e for every US dollar in investment returns, we're getting less in Sing dollars.

But as I've highlighted in an earlier entry, our foreign reserves are growing anyway every year, because of our huge current account surpluses, which in itself is largely due to our mandatory savings regime and tight fiscal policies. This is a systemic feature of the Singapore economy. (I believe China is copying us very closely in this respect.)

There has always been a very strong 'mercantilist' approach in Singapore's policy-making, in that we want to amass as much foreign reserves as possible (in the old days it was gold), primarily to defend the Sing dollar (which is pegged within a range, not free floating as often mistakenly believed) against unwanted speculative attacks.

In fact, managing foreign reserves should involve a conservative approach, rather than a high-risk approach. You do want to protect your capital base (anyone still remembers Bank Negara's ill-fated foray into currency speculation). Actually, I'm more concerned by GIC saying it wants to diversify into hedge funds and other riskier assets. Or perhaps our foreign reserves have grown so large that GIC management has decided we can afford to 'tikam-tikam'.

The question then is what do we do with our huge foreign reserves - invest of course! But I think the question should really be rephrased another way: who in the long run has a better record at investing, the government and its affiliated agencies or the private sector?

A thought to ponder: if we cut back our mandatory savings regime, releasing the funds to the private sector to invest, would the private sector get a return better than 9.5% p.a? (Hint: I don't think Warren Buffett was ever a public servant.)

Dr Oz bloke said...

What makes me very uncomfortable is the "secrecy" of the GIC.

I do believe that GIC hires "talent" from the private sector. So what makes it any different from the private sector itself if you hire the private sector people?

I don't think the issue is in the personnel. It is perhaps the big kahunas who approve or disapprove strategies from the guys they employ.

All this secrect makes it difficult for us to assess whether the GIC team is worthy of continuing in their positions or is it time for a change.

That is dangerous isn't it?

My wish is that GIC posts it's performance results yearly just like any other private sector investment firm. Only that way can we really answer your question.

Anonymous said...

They are only disclosing now, because IMF has been pressing them to do so (for international transparency) and you know this is the big year for Singapore and IMF - they are coming here to hold their big conference in S'pore. So it's only polite for LKY to accede to IMF's request.

After 2006 ... haha, back to secrecy again. You won't hear about GIC's performance until 2025, and only if IMF comes back to Singapore that year.

Eric said...

Mr. Wang,

IMHO it is better to state that you have changed your original post so that there is no question of credibility. Just my 2 cents.

If markets are efficient, one can't expect the GIC (or anyone not named Buffet) to do better that the market over a 25 year period. You seem to be claiming that markets aren't efficient. My hunch is that the GIC is investing overseas where it doesn't have insider info or the clout you claim. Thus, meeting the historical return is reasonable. It is certainly not dismal or shocking.

What return do you expect from the GIC?

Dr Oz bloke said...

Eric, do you work for GIC? Do you know people who work for GIC?

I would want GIC to achieve a return of 15% per year over the long term of 25 years.

This is considering the vast amounts of money we pay to the GIC personnel to analyze investment vehicles and investment the money for us. If you take away the management fees, I think it would be fair for us to expect the GIC to give better returns than what the man on the street can achieve with buying into a passively managed index fund.

Mr Wang Says So said...

Btw, Eric, I edit my posts all the time (even those which have gone off the main page). I also retrospectively add pictures to many of them (and for many of them, the picture makes an important substantive point). And from time to time, I remove & delete posts from my blog which I think are not so significant or interesting. I write thinking of the future too - well-written posts will serve as useful reference in the future (notice how regularly I link to my old posts for background or historical info).

No, I do not think that all markets are efficient (emerging markets like Indonesia, Malaysia, India and China are, in my view, certainly not efficient). And besides I don't think that the "efficient market" theory applies to other asset classes like real estate which GIC also invests in.

Reasonable return? Well, TODAY online reports that Harvard University's fund returned 16% p.a over 10 years. Once again, that's about twice as good as GIC.

You do not think that GIC has clout overseas? Well, let's say you wish to buy a property in Bangkok for investment. Then let's say GIC wishes to buy a (bigger) property in Bangkok for investment.

Are you able to pick up the phone and say, "Hi, Thaksin, I'm thinking of investing USD300 million in your property market next month, could you arrange for your relevant government ministers to brief my managers on any relevant issues relating to Thai property market?"

You can't. I think MM Lee can.

Anonymous said...

I think many people believe that with more resources available, it would be easier to outperform the market. This is usually false. A comparision between the man-in-the-street investor and a large fund is unfair at best.

It is easier to make fantastic returns on smaller capital than to make the same returns on a larger capital base. Individual investors, for example, have the luxury to invest in small-cap stocks, while a fund manager would not have the option to do so - pumping large amounts of cash into small cap stocks most likely gives them more money than they can handle effectively.

Another example, bonds. Small investors can buy them and make tidy and stable profits. More money? Buy more of the same. Fund managers may not be able to do so. They can only park so many resources into a limited bond issue (I am talking about company bonds, of course.)

Hence, more resources really means more limitations. Of course, this doesn't mean money can't be made for large funds. You just need skill or a lot of micromanagement.

Another point I wish to note is , since the GICs are relatively inefficent, are there any ways to 'divest' its bulk. Perhaps more money could be pumped to support local enterprise. After all, GIC's are supposed to safeguard our money-- puting it back into the system seems like a good way.

chrischoo said...

Revealing the annualized return over a 25 year period doesn't say very much. I'm sure that if they had fantastic returns over the past 5 or 10 years they'd reveal that figure instead of the annualized 25-year return.

Was the Singapore-Suzhou Industrial Park invested using GIC funds? After all, the chairman of the GIC was the same person who championed Singapore's foray into the Chinese market then.

gold said...


I am trying to learn here. Can someone enlighten me?

When the news articles state that the annual returns are xx% like in this article, do they mean the

Artihmetric mean or the geometric mean?



Anonymous said...

Geometric, definitely.

Over 25 years, it is meaningless to use arithmetric.

moomooman said...

Congrats Wang. You have hit jackpot with this post. This may not be the most comments ever... but the amount of knowledge in this post surpass what you can learn from some Business School.

I think I have already save like 20k just by reading this comments section.

gold said...


I would like to ask 3 questions.

I noticed the terms used here

"8.2% annual return", "annualized returns" and "yearly returns"

1) do they all mean the same thing?

cause in this wikipedia article, the 2 different means use different terms. One of them uses annualized the other uses annual.

2) Is it fair to say that whenever i come across financial articles or news articles they all mean the geometric mean?

3) And another question is GIC receives inflow of funds from the contribution of the taxpayers at a yearly basis (i guess), then how would this affect the computation of the annualized returns?

Thank you

tee said...

gold - Annualised returns in finance are ALWAYS in geometric form. I think the key difference between annualised and annual returns is annualised is the returns that are achieved averaged out over the years, while annual returns usually refers to each particular year.

ie. year 1 i gain 50%. year 2 i lost 33%. Hence, annualised return for the past 2 years is 0%

Only geometric interest/returns make sense, since the income earned/lost over the year has the function of being able to be reinvested.

ie. interest is charged for interest owed, since the interest you owe could have been invested for returns elsewhere; by not paying the interest, you are depriving the respective institutions of investing the amount of money, hence you have to 'compensate' in a sense.

Third qn, i would just say it's A level maths (used to be o level a maths syllabus) involving geometric progesssion and the summation of GP. Too technical to be posted here. Maybe you could read up a bit on your own.

and refer to geometric series.

tee said...

sorry...in you wikipedia article, it says that average annual returns are arithmetic return. However, this usually works for small percentage points over short periods of time.

ie. 1% gain in year one and 0.5% loss in year two. The real average return per year is close to the approximate of 0.25% a year using the formula. However, if let's say there's a gain in 100% gain in the 1st year, and 100% loss in year 2, although u have lost all your money, the arithmetic average will incorrectly state that your annual return is 0% (no loss no gain).

Hence, annualised return (the 2nd example given in wikipedia) is the most accurate standard, and should be taken by default. Anything otherwise is simply misleading.

tee said...

argh...pls replace 'arithmetic return' with to 'arithmetic average' in tje previous post...always make this sort of errors.....

Eric said...

Dr Oz Bloke,

I would want GIC to achieve a return of 15% per year over the long term of 25 years.

A higher return isn't free (there is no such thing as a free lunch). If you want the GIC to target a return higher than the market return, then you have to accept that they will have to invest in riskier assets. It's a fact of life and there is no way around it: higher returns are accompanied by greater risk. The return earned by the GIC suggests a conservative approach, as mentioned in previous comments.

Eric said...

Mr. Wang,

You can't. I think MM Lee can.

True, I can't but if MM Lee can then so can lots of other leaders. Poof, there goes Singapore's clout. It will be arbitraged away. For example:

"Hi, Thaksin. I hear you're giving a great deal to MM Lee. I'll take the same deal but I'll give you $1 million more. We'll both be better off, friend."

Singapore does not have any special advantages and therefore cannot get better deals in the long run.

gold said...

To tee:

Hi, thanks for taking the time out to answer my questions.

Perhaps I ought to be clearer in my questions.

1) I noticed the terms used here

"8.2% annual return", "annualized returns" and "yearly returns"

do they all mean the same thing?

the reason that I asked this is because I noticed that there seems to be some issue about misreading the article.

the first anonymous used yearly returns then eric replied something to the effect of saying that the compound effect is ignored.

So what I am asking is a straightforward Yes/No question, are the terms yearly, annualized, annual the same? if no, then what is the correct way to use each term?

as for q 3) i was thinking something like this.

say year 1, you start off with $100 you make $20 at the end of the first year, so first year the return is 20%. Now here comes the injection of new funds from CPF, say another $100.and at the end of the second year, another $24 is made

So the sequence is like this:

Start of y1:$100 total: $100
End of Y1: Made $40 total: $140
Start ofy2:$100 added total: $240
End of y2: Made $24 total: $264

I am guessing here, but i think the first year has a return of 20%(20/100) while the second year has a return of 10%(24/240), correct? But the question is how to calculate the annualised return now? Clearly, this would have to be different from the way its shown in the wikipedia article where no new capital is injected in that example.

Now the question is how would you calculate the annualised return since fresh capital is put in every month? I am guessing its every month since the caption of Mr Wang's picture of Warren Buffett says CPF rolling in every month. And more importantly, the way the annualised return is calculated bearing in mind new capital comes in every month, is it still a fair way of measurong its performance?

Thank you

Anonymous said...

Oh you use weighted average. Weighted average would mean that in your calculations, you give 25 times more weight to a $1 invested 25 years ago than $1 invested 1 year ago.

In real life, someone punches in the numbers every day (and assets you hold eg bonds, bills etc are also marked to market (ie valued) every day at their prevailing daily price, and currency conversions will also be done according to the prevailing rates that day).

Then whatever info you need, you just put in your query accordingly and the computer generates the numbers.

Don't try to do it with your pockey calculator ok. :)

Anonymous said...

bAiya, earn 9%, 15%, 25%, 50%, 100%, so what? I don't even get to smell it!!! Even if they go bankrupt, so what!! Everytime say Singapore rich, garment economic grow this much that much, at the end oso like that, no job, pay like shit, employers like god, banks earn more and more, live in dark, no gas, everything mean testing, get a few can food, get $20 ntuc voucher, owe $ to so many garmen agencies....see my CPF 50k, but cannot use to survive life, at the end the $ go where, oni can eat CPF statement and lao sai!!Every month put CPF $, when going to die liao oso cannot use the $ to buy me my last 5 course meal! I wish I can bring the $ with me to my grave, hahaha!

The oni thing that if GIC earn $ is everybody clap hand, but if GIC lose $ then all humtum the garmen, at the end oso one big word - LL!!

But i oso wana know, how come the garmen always paint the picture until so sui, everyday is sunday meh???

tee said...

gold: 1) yes, they mean all the same here. People may like to vary the terms used like 'per annum returns', 'yearly returns', 'annualised returns', etc - it may sound like people are confusing the different terms, but nobody cares - in the mind of people talking about finance, they should all be in geometric form. If anything else, the term 'approximate' should be added for clarity.

3) I guess that's already answered. It's usually not convenient for lay people to make such calculate on their own.

Sorry, if my expression is pretty bad.... :S

eric said...


"yearly" and "annual" returns are used interchangeably. "annualized" return usually connotes an investor having an investment horizon that is longer than a year. In this case, one can compute a hypothetical annual return. This synthetic annual rate is sometimes referred to as an "annualized" return. Most of the time, you should be able to tell whether an article is referring to an annualized return from its context.

Anonymous said...

I think the GIC returns are respectable considering that it is not 100% invested in equities and they reportedly have a "conservative" approach, which I think implies no leverage.

Certainly the returns could be higher. Indeed, they could probably have gotten similar returns if the government had simply invested the money in index funds tracking various stock markets and bonds. Even better, as implied by some comments, is why not simply invest the money with the likes of Warren Buffett and Peter Lynch? Then we wouldn't need to employ all those highly-paid GIC professionals.

But then this raises another question, should Singapore invest its reserves with foreigners overseas or is it better to try to establish a Singaporean fund industry with GIC as the catalyst?

The same question can be asked about SIA, DBS, Singtel etc. Why not simply throw open the country's commercial sector to foreigners? Perhaps Cathay Pacific is a better airline for serving Singaporeans? Or perhaps Citibank would offer better service and higher rates than DBS? Maybe.

But then if indeed all of Singapore's reserves were invested by foreigners based in New York and London, would Singaporeans as a group be better off? Would such an approach be better for the country? I don't know. Each person will have his/her own opinion about this.

All I can say for certain is that Singaporeans will then have something new to complain about- Why are our reserves being managed by foreigners and foreign firms?

Anonymous said...

Just my two cents' worth:

"I think the GIC returns are respectable considering that it is not 100% invested in equities and they reportedly have a "conservative" approach, which I think implies no leverage."

Firstly, it is only now that they report themselves as having a "conservative" approach. You may believe it or you may not. Personally, if I were GIC, with this kind of returns to declare, I definitely would claim that I had all along in the past 25 years been "conservative" in my targets. And just hope that no one remembers my extremely high-risk ventures like the Suzhou project.

No leverage? Of course there is leverage. The leverage is compulsory by law. You, and every other citizen of Singapore, are obliged to lend them 25% of your salary every month. You'll get it back in ... how many years is it before you turn 55, or 62, or whatever age they're raising the retirement age to now?

"Even better, as implied by some comments, is why not simply invest the money with the likes of Warren Buffett and Peter Lynch? Then we wouldn't need to employ all those highly-paid GIC professionals.

But then this raises another question, should Singapore invest its reserves with foreigners overseas or is it better to try to establish a Singaporean fund industry with GIC as the catalyst?"

You are mistaken. They do outsource a significant amount of their money to foreign fund managers, hedge funds etc for investments. This is also being reported in the media now. I guess GIC is just not that great at picking fund managers.

"But then if indeed all of Singapore's reserves were invested by foreigners based in New York and London, would Singaporeans as a group be better off? Would such an approach be better for the country? I don't know. Each person will have his/her own opinion about this."

The money HAS to be largely invested overseas. These are foreign reserves. I believe that the SGD component is managed by Temasek, via the GLC vehicles of Singapore companies like SIA, SPH, PSA, Keppel, NOL etc.

Anonymous said...

I am the original poster dated 1.28am. I would like to reply to your assertions.

Your replies clearly show that you have a totally cynical view about the government's statements. Alright, this view may be justified, but if you are so cynical to begin with, then why even take any of the figures or statements at face value?

Here is a contrarian thought: Perhaps the GIC returns are much higher than the 9.5% or 8.2% figure released?

Why do you think LKY mentioned the CPF issue immediately after he revealed those figures? If you read the speech in its entirety, the CPF portion breaks the entire flow of the speech and was clearly injected separately.

I think the sole reason they put the CPF part in is to pre-empt the issue of why are Singapores getting only 2.5% (or 4% for SA) on their CPF when the government is making over 8% in its investments? If in fact GIC makes 15% and they actually revealed it, I think there would be a massive public clamour for higher returns on the CPF (and rightly so).

Second, your views about "leverage" is totally off the mark IMHO. Do you know what are the effective tax rates in the US, UK and Germany? If you think the net 7% CPF contribution from the salary is high (20% from employee minus 13% from employer), you would be shocked at the social security and state taxes in many developed countries. Sure, they promise employment benefits and old-age pension. But it's only a promise. And if you follow global economic issues, one of the biggest challenges facing state-run pension programs in Europe and US over the next 10-20 years is that the governments simply do not have the money to pay what they promised because these societies are aging too rapidly.

I am not saying the CPF system as run by Singapore is better. Maybe it is indeed worse. But you should look at these issues in perspective.

Third, if you don't believe them anyway, then why do you believe the media reports about out-sourcing the GIC funds? So the issue then boils down to what do you believe about the statement? Why is the "conservative" approach a bald-faced lie and why is the out-sourcing of investments the honest-to-God truth? Maybe we shouldn't believe anything they say at all!

Fourth, the money being invested overseas is NOT the same as the money being sent to overseas firms to be managed. If you buy US stocks on your personal brokerage account, for example, the money would be considered to be managed by you who is presumably based in Singapore. If instead, you decided to send your money to your private bank account in Switzerland, then that money would be managed by foreigners overseas. There is a huge difference between managing your foreign investments from onshore, and sending your foreign investments to be managed overseas.

Fifth, SGD assets like those managed by Temasek are BY DEFINITION NOT "foreign reserves". Foreign reserves in Singapore, like those in China, Japan, HK etc, are state-owned assets (usually of the liquid type) denominated in foreign currency.

Anonymous said...

You are right, maybe we SHOULDN'T believe anything they said at all.

25 years ... and one disclosure? If you were a high net-worth investor, would you invest yur own money with a hedge fund like that?

Anonymous said...

I am one of those who really don't believe anything from the government :)

I don't believe I will get my CPF back any earlier so I am planning to migrate to 'take profits' before the whole system crashes.

hugewhaleshark said...

...the net 7% CPF contribution from the salary is high (20% from employee minus 13% from employer)...

Dude, do you know how CPF constributions work or not?

Anonymous said...

OK, my mistake on the CPF calculation. Was doing it on the rush.

Nonetheless, I still think the CPF contribution compares favourably to my personal experience in the US. My total tax (CPF+tax) in Singapore, comes up to clearly less than 20% of my total income (salary + bonus). My total tax bill (Federal tax + state tax + social security) when I was working in the US was 35-40% of my total income.

Moreover, I can use my CPF to pay for a home, which I cannot do with my social security because one does not technically have an individual social security account. It works more like a tax on current workers to pay to retirees.

So at the end of the day, based on my own experience, I think the CPF system is better for me.

Frankly IMHO, if you don't like the thought of the government managing your CPF funds, then either manage it yourself by investing in stocks and unit trusts, or use it to pay for your home.

Anonymous said...

In case you are all wondering how come my total tax in Singapore is less than 20%, note that the 20% CPF contribution from salary is only up to a limit of $5K. So if one makes >$5K, then the CPF contribution is effectively less than 20%.