Cablegate: Gic Issues First Annual Report in Bid for Transparency

DE RUEHGP #1059/01 2740903
R 300903Z SEP 08



E.O. 12958: N/A


1. Summary: In a bid to provide greater transparency and allay
global concerns over sovereign wealth funds, Singapore's state-owned
Government Investment Corporation (GIC) issued its first annual
report offering some details on the operations of one of the world's
largest and more secretive investors. The report falls far short of
full transparency, and does not provide financial statements or even
the size of the fund. The report reveals that GIC's assets are
focused primarily in developed markets, with the U.S. as the biggest
single destination and a portfolio that has moved from safer
fixed-income assets to alternative investments over time. The real
(inflation-adjusted) annual return over the past 20 years was 4.5
percent. With a substantial hoard of cash, GIC may be looking to
invest in distressed assets in the United States. End Summary.

2. On September 23, GIC issued its first annual report in its
27-year history, disclosing a reasonable but not stellar 4.5 percent
real average annual return over the past 20 years. The GIC is a
sovereign wealth fund (SWF), investing a portion of Singapore's
fiscal surpluses overseas. The reports will now be made annually.
With this report GIC joins Singapore's other SWF Temasek Holdings
which began issuing annual reports in 2004.

Opening the books to keep markets open

3. GIC said it issued the report in order to allay concerns that
are circulating in Europe and the United States about potential
political goals of sovereign wealth funds. The extra transparency
could also serve to head off any regulations that might restrict its
investments abroad. In the report's opening statement, GIC's Deputy
Chairman Tony Tan assured the investment community and the countries
in which it invests that the SWF's activities "have only one purpose
- financial return." The report goes on to state that the GOS
"neither directs nor interferes in the company's investment

4. However, the report falls far short of full transparency,
declining to reveal detailed financial statements or even the exact
size of the fund. GIC did not provide any detail on the size of
assets under its management, saying that the GOS did not view it in
the national interest to do so. The report says only that GIC's net
assets are "well over US$100 billion", a figure GIC has used over
the past decade. Outside estimates place the size at roughly
$300-400 billion.

5. Nevertheless, the report does provide some insight into GIC's
assets, showing a trend toward investment in riskier markets and
alternative asset classes (see table in para 9). Only 26 percent of
GIC's assets are currently in fixed-income investments like bonds,
down from over 75 percent when the fund was first established.
Investments have since spread into riskier hedge funds, real estate,
private equity and venture capital. GIC has also diversified into
emerging markets, although 80 percent of its assets are still held
in the United States, Europe or Japan. The U.S. is the largest
single destination for GIC investment with a 34 percent share,
including GIC's USD 6.9 billion investment in Citigroup in January.

6. GIC's report showed a rolling average annual real return of 4.5
percent over the past 20 years, or 5.8 percent in nominal terms.
GIC attributed what it sees as respectable returns to sustained
growth and declining inflation in the 1980s and 1990s, a shift in
assets from fixed-income to higher performing assets, and active
management of the funds. However, the Asian financial crisis in the
late 1990s, the technology bust of 2001 and the recent credit crisis
have negatively impacted balance sheets. The current figure is
considerably lower than the 9.5% figure cited in 2006 by Chairman
(and former PM) Lee Kuan Yew as the return for the first 25 years of
GIC's existence. A chart of the rolling 20-year return showed a
decline of two percentage points since 2005. The decline may simply
reflect the exclusion of GIC's high returns in early years which are
no longer included in the rolling average, but may also indicate
some serious financial losses in the past few years. GIC has taken
heat from Singaporeans for multi-billion dollar investments in
Citigroup and Swiss bank UBS in the past year whose share prices
have since dropped sharply in value.

7. In an apparent attempt to personalize GIC for Singaporeans whose
funds GIC manages, 20 pages of the 48-page report are dedicated to
introducing the members of GIC's various boards of directors and
dozens of managing directors. Only 45 percent of GIC's
approximately 1000 staff is Singaporean, with the rest from
overseas, including 12 percent from the United States. The report
also discloses that one-third of the assets are handled by external
managers, particularly for funds investing in real estate funds,
private equity funds, bond funds, index funds and hedge funds.

New U.S. Investments?

SINGAPORE 00001059 002 OF 002

8. GIC's report notes a "more challenging investment environment"
going forward with risks from macroeconomic imbalances and rising
commodity prices, but also emergent opportunities. At a press
conference announcing the release of the report, Group Chief
Investment Officer Ng Kok Song said that the credit crunch in the
United States "would present very interesting opportunities in
impaired assets." With seven percent of its holdings in cash,
approximately USD 20 billion, GIC is well-placed to pick up
distressed assets. Deputy Chairman Tan warned, however, that the
worst of the crisis may not be over and GIC would still be prudent
in its investments.

9. Asset Mix of GIC
% %
Public Equities 44
Developed Markets 34
Emerging Markets 10

Fixed Income 26
Nominal Bonds 20
Inflation-Linked Bonds 6

Alternatives 23
Real Estate 10
Private Equity, VC & Infrastructure 8
Absolute Return Strategies 3
Natural Resources 2

Cash & Others 7 7
Total 100 100

10. Geographical Distribution of Investments

Americas 40
United States 34
Others 6

Europe 35
United Kingdom 8
France 5
Germany 3
Ireland 3
Italy 3
Switzerland 3
Others 10

Asia 23
Japan 11
China/Hong Kong 4
South Korea 2
Taiwan 2
Others 4

Australia 2 2

Total 100 100


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