(as at 31 March)
Concentration Profile of S$266b Portfolio
As an owner, we are fully flexible in our ability to deploy capital. We do not have predefined concentration limits or targets for investing, whether by asset class, country, sector, theme or single name. We also have the flexibility to take concentrated positions and adopt a long investment horizon.
Our portfolio of mostly equities means higher year to year volatility for our annual returns, including a higher risk of negative returns, with expectation of higher positive returns over the long term.
We promote a culture of risk awareness and balanced risk taking. Our risk-sharing compensation philosophy aligns the interests of employees with those of the shareholder, puts the institution above the individual and emphasises long term over short term. Balanced risk taking applies to investments as well as building institutional capabilities, such as when we take risks to develop our people.
Our risk management framework covers strategic, performance and operational risks. We track and manage risks proactively and through cycles. There are designated risk owners for specific risks at Company or unit levels. We manage our leverage and liquidity conservatively for resilience and flexibility, even in times of extreme stress.
|Strategic risks||Performance risks||Operational risks|
To minimise operational risks, we embed risk management in our systems and processes. These include our approval authority delegation, company policies, and risk reporting to our Board.
We have disciplined processes to ensure that various perspectives are always considered. Investment proposals are submitted under a two-key system, for instance by market and sector teams, to our management investment committee. Depending on the size or risk significance, these may be escalated to our Executive Committee or Board for final decision. Functional teams provide additional specialist perspectives and independent review.
Country and sector risks are built into our risk-adjusted cost of capital for each investment. We seek to buffer risk through valuation discipline.
Legal & Regulations
We comply with all obligations under Singapore laws and regulations, including those arising from international treaties. We also comply with the laws and regulations of the jurisdictions where we have investments or operations.
Our Legal & Regulations unit (LRU) ensures that policies, processes and systems are consistent with applicable laws, and aligned with Board directives. For instance, our policy on derivative transactions permits only personnel authorised by a board resolution to enter into such transactions within tightly defined scopes and limits on behalf of specific designated entities.
LRU monitors regulatory reporting compliance through robust securities tracking systems. Regulatory requirements and monitoring systems are continually reviewed and updated to track changes in laws and regulations.
Our Temasek Code of Ethics and Conduct (T-Code) and its related policies guide our Board directors and staff in their daily dealings and conduct. With integrity as one of the overarching principles, T-Code policies on probity cover areas such as anti-bribery, whistle-blowing and prohibition against insider trading. Our annual staff bonus plans include T-Code compliance requirements.
Business Continuity and Incident Management
Our contingency management framework ensures business continuity, and helps manage potential risk incidents arising from safety, security and other threats.
We care for the safety, security and well-being of our staff and their families during emergencies. We conduct regular exercises to test our readiness for disaster recovery and to cope with various contingencies such as infectious disease outbreaks.
Temasek has the flexibility to take large stakes in investments in expectation of superior returns. Our concentration profile is the result of such investments in aggregate. Our top 10 holdings represent 48% of the total net portfolio value.
Our largest geographic concentration by underlying assets remains in Asia, with 28% and 27% in Singapore and China respectively as at 31 March 2015. Australia is third at 9%. This takes into account the underlying assets of our portfolio companies; for example, Singtel’s assets in Australia.
Our largest sector concentration as at 31 March 2015 was in the financial services sector, at 28% of the total portfolio, down from 30% a year ago.
Singtel remains our largest single name concentration at 13% of our portfolio in March 2015, down from 26% in March 2005.
Risk to Short Term Reported Returns
Our mark to market policy aims to reduce the behavioural risk of holding on to poor investments for fear of reporting realised losses. There is consequently greater volatility in reported annual results that are valued on a mark to market basis.
In any given year, our net portfolio value may see a once-in-20-years swing of as much as 30-40%. We saw this during the Global Financial Crisis, when our net portfolio value fell 30% in one year, only to rebound 43% the next year.
We use a range of formal market risk metrics to track the forward looking volatility of our portfolio. These include portfolio Value-at-Risk (VaR), the 12-month forward looking Monte Carlo simulation of the portfolio, and general market risk indicators such as the CBOE Volatility Index (VIX).
We track the Value-at-Risk (VaR) of our portfolio using weekly price movements weighted towards the most recent six months. This provides an estimate of a one-in-six chance of how our portfolio value may fall over the following 12-month period, assuming no active changes to our portfolio composition or market conditions.
As at 31 March 2015, our one-year VaR was S$19 billion or 7% of net portfolio.
Our largest sector concentration as at 31 March 2015 was in the financial services sector. This was 28% of the portfolio and 39% of total portfolio VaR.
Singtel remains our largest single name concentration at 13% of our portfolio in March 2015, down from 26% in March 2005. Before accounting for diversification effects, it constitutes 22% of our portfolio VaR.
Our top 10 holdings, representing 48% of our portfolio value, contribute 57% of total portfolio VaR.
Our market risk metrics suggest that risks are currently low, in line with the low market volatility. This may give a false sense of security as risks could have been masked by successive and extremely accommodating Central Bank policies in the aftermath of the Global Financial Crisis.
The VIX is a key measure of market’s perception of short term volatility in the S&P500 Index. Though Temasek’s VaR tracks VIX quite closely over different economic cycles,they tend to lag VIX especially in risk-off scenarios. This is due to the emphasis placed on the most recent six months volatility in its computation.
VIX Trend and Temasek’s VaR as % of Portfolio Value (April 2005 to March 2015)
Likely One-year Returns
Looking into the immediate future, we use Monte Carlo simulation based on past market data to give a sense of the likelihood of a range of returns for the next 12 months.
Applied to the Temasek portfolio mix, our Monte Carlo simulation shows a five-in-six chance that our one-year portfolio returns can range from -12% to +17%.
In the chart below, the Monte Carlo simulation curves represent the likelihood of one-year returns for some of the recent financial years. Narrow curves mean less volatility compared to the broader, flatter curves of the 2008/09 Global Financial Crisis years.
(as at 31 March)
Simulation of 12-month Forward Portfolio Returns
Toggle the years to show/hide the corresponding graphs.
Comparing the 5-in-6 chance range of simulated 12-month forward portfolio returns and the respective total shareholder returns (TSR) over the past decade, the chart shows that TSR can be volatile. TSR results have mostly fallen into the 5-in-6 chance range of simulated returns. The simulated portfolio return for FY15/16 is consistent with a low volatility environment, largely encouraged by extremely accommodating Central Bank policies. This could change rapidly as shown in the period leading up to the GFC.