GIC and the risks they take

Errata: GIC didn't buy Shin Corps. Temasek Holdings did. Mr Hardy's mistake. I'll retain the original post here for integrity's sake. (good lesson, next time I'll have to check my facts!)

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KTM, over at kwayteowman.blogspot.com posed 3 questions. One of which was on GIC and the risks they take to earn their returns and whether or not we have a say in things. Thus far, Singapore government has treated GIC like a fund management company with government links and resources and to some extent an obligation to preserve capital and be productive.

First my main points:

1. The number one rule for investment is that you should only invest what you can afford to lose and GIC this time were forced to sell their shares in Shin Corps for the sake of political reasons. (If Singapore was more belligerent we could do what the US do. Say f*ck it and assume you are right anyway.)
   
2. The point of setting up a GIC is to preferably deliver better than risk free rate of return and if possible beat the market rate of return.The only benchmark for performance is a track record of delivering returns given global risk parameters. So long as money grows, well done.
   
3. Ultimately, the only thing we should be concerned about is if GIC invests in things which are not profitable, do not make good financial sense and are super risky with infinite liabilities which jeopardizes the entire portfolio and reserves.
   
4. We should be concerned about overall portfolio returns and risk and not the isolated event.

Other than that, there's really no issue for the citizens.

Next, I'll state my case here.

Let's say we got an investment company, GIC which manages a Trust fund. The proceeds of this Trust fund is pumped back into the coffers of the Republic of Singapore to build schools, to train soldiers, to provide for any number of welfare improvements and initiatives.

Every year, GIC gets money to invest on behalf of the Republic of Singapore.

The fund managers of GIC come up with investment ideas and plans. They look for good long term investments which suits their risk profile. Then they give to the Government to approve and justify the acquisition of shares or investment in companies.

Kway Teow Man, argues that the Government of Singapore has the obligation to set limits on the risks GIC takes. And I am sure that the GIC is shackled with certain restrictions due to geopolitical considerations.

KTM wants to know what's the appropriate return for the risk GIC undertakes. My answer is straight out of the textbooks: its a function of the risk-return trade-off. More accurately, they should aim for a return better than a passive portfolio index. (the Morgan Stanley World Index for example)

KTM wants to know if we can impose rules on what GIC can and cannot invest in for political reasons. My response: Is yes they may but ultimately, fall back on the risk-return trade-off and then re-evaluate to see if its still a good value buy.

All Mr Hardy can say is that the only rule GIC should abide by is Profit Maximization where the Risks taken are commensurate with the Returns.

Also, for each investment, only a certain portion of the funds allocated for investment are used to fund the acquisition and that the maximum downside risk should not wipe out the entire portfolio.

These are all stock standard finance textbook response.

When GIC moved to acquire shares of Shin Corps, they bought into the shares of a telecom's company based in Thailand. (This is a good value investment by the way, b'cos this telcos are cash generating and are in the black) They were blindsided by the coup or at least overestimated Thaksin's ability to govern Thailand. A coup ensued, GIC made to sell Shin Corps back at a loss.

This time Singapore was 'suey' lor.