Mr Lim Chow Kiat, CEO of GIC, contributed the foreword “Investors must prize humility” to OMFIF’s 2019 edition of Global Public Investor. The report surveys GPI’s performance and practices across a wide range of investments and activities.
Investors must prize humility
As they tread a path full of uncertainty, investors must re-examine their historical assumptions in the light of rapid changes in technology and business models.
The outlook for risk assets is one of low returns, with a path full of uncertainty. GIC’s strategy has been to build a resilient portfolio and be prepared for change.
The low expected returns stem largely from low asset yields. Starting with 10-year Treasury inflation-protected securities, which currently offer a real yield of 50 basis points, one can estimate the prospective risk-free, dollar real return. In 10 years, when we look back, it will probably be 50 basis points per annum. This expected return anchors that of other asset classes as investors trade higher risks for higher returns. In the last decade, amid low bond yields, more money has been moving into riskier asset classes such as equities, real estate and private equities. Their valuations have risen, curbing prospective returns.
In the 1920s, US economist Frank Knight drew the distinction between risk and uncertainty. He defined risk as applying to situations where, while the outcome is unknown, the likelihood of possible outcomes can be quantified through standard statistical computations such as averages, standard deviation and correlations. Uncertainty, Knight said, is drastically different, applying to cases where the outcomes were unknowable and their probabilities incomputable. The distinction between risk and uncertainty is particularly germane for investors today. Markets in recent years have featured abundant liquidity and low yields. While this has suppressed volatility, it has also obscured growing uncertainty stemming from many spheres, including political, geopolitical, social and economic issues. New forces are emerging, fuelled by technological changes and the need for domestic policy reform in many countries. Their impact reaches areas of fundamental importance to investors, such as the construct of global trade and financial markets, and the sharing of value in the economy.
In this environment, investors must develop ways to re-examine and replace historical assumptions. Similarly, they must adjust their mindsets and investment assumptions when underwriting businesses in the light of rapid changes to technology and business models. Investors should prize humility. Amid the uncertainty, bouts of heightened market volatility may also occur and offer attractive opportunities. As a long-term investor, GIC stands ready to take advantage of such potential dislocations. At GIC, we emphasise one of our key investment principles – ‘Prepare, don’t predict.’
We investors must ‘know ourselves’ in terms of our investment goals, risk tolerance, preferences, strengths and weaknesses. Only then can we move forward with confidence, and respond appropriately when the unexpected happens.