This is an edited transcript of the keynote speech given by GIC CEO Lim Chow Kiat at the Wealth Management Institute (WMI)’s Global-Asia Family Office (GFO) Summit 2023.

Ladies and gentlemen, good morning.

How do we talk about the topic of long-term investing across generations, when daily we are bombarded by volatile news headlines of war, sanctions, inflation, trade conflicts, protests, and artificial intelligence (AI)? Every day we open a newspaper and we see all these headlines that portray a world in trouble – and by extension, bad forward investment returns.

If you go back in time, you might find similar headlines in the 1970s, when we had the Cold War, wars in the Middle East and Southeast Asia, raging inflation, and political division. The one exception is climate change, as we knew very little about it back then. In those days, the forecasts were pessimistic, and financial markets suffered major losses. The decade saw both bonds and stocks registering negative real returns. Imagine: at that time, interest rates climbed by 10%, meaning that over five years a typical bond benchmark returned a 31% loss1. Likewise, stock multiples contracted by half to mid-single digits, from 14 times to 7 times, producing a 52% loss2. It must have been very painful.

But if you stretch the investment horizon into the 1980s and eventually further to today, investors navigated through the years quite well. In the past few decades, we have had numerous financial crises, including the Latin American Debt Crisis, the Asian Financial Crisis, the Global Financial Crisis, the Covid-19 pandemic and corresponding economic downturn. And yet through it all, US stocks returned 12.2% per annum, 9.4% above inflation; with US bonds producing 6.1% per annum and 3.3% above inflation3.

These returns reflect a multi-decade journey of lower interest rates and higher multiples, resulting from globalisation, tech advancement, central bank disinflation efforts – and more recently, doses of government money. Most investors amassed significant wealth during this period.

Lessons learnt from the past

So, how do we move forward? Fortunately, the past offers some lessons and inspiration.

In terms of lessons: first, we have to be clear about our destination. Destination is about long-term goals, including preserving or growing wealth for future generations, meeting financial obligations, enabling philanthropy or more risk-taking in other areas.

GIC, for example, is like the family office of Singapore. Our destination is clear: to preserve and enhance the international purchasing power of the reserves under our management over the long term. This clarity drives all our investment and organisational decisions.

— Lim Chow Kiat, CEO, GIC

We base our asset allocation decisions on an assessment of whether the desired risk premium adequately compensates us. In terms of risk management, we consider stress loss to determine where we might suffer permanent impairment during a potential downturn. Everything we do must align with our long-term goals, because when the market gyrates and the headlines hit, it’s very difficult to stay the course.

Second, with clarity over our destination, we are then able to pursue our long-term strategy:

  1. As a long-term investor, we harvest illiquidity premiums to generate higher returns. Illiquid investments attract fewer competitors and less capital, which is why we are able to access a higher rate of return.
  2. We identify dislocations caused by instability and volatility, where market participants are forced to either sell or buy due to investment mandates and performance metrics, among other reasons.
  3. We focus on long-term themes.

Long-term themes are more controllable than short-term themes because the drivers are different. For example, for many asset classes, yields dominate eventual total returns. In addition, long-term trends have more certainty – future changes in demographics, urbanisation, and the energy transition can be predicted, and tend to persist over time.

The third and last lesson is the importance of good processes, because we cannot control short-term outcomes. This includes diversification, so when bad things happen you can avoid disastrous losses. It includes risk compensation, which translates into taking risks in risk-return terms.

At GIC, we operate within our CIA framework. ‘C’ is for compensation, which ensures we have a certain level of return relative to the risk we take on. ‘I’ stands for informed, where we make sure that we make investment decisions knowing all the key details and avoid surprises if an investment evolves in a certain way. ‘A’ is for authorised, which ensures that we act within our mandate.

Good process also includes avoiding permanent impairment in the short term, which can materialise in several forms. The first is asset impairment, where a business model gets disrupted or management doesn’t do a good job. It can also arise from our own financial arrangement, where we take on debt but are unable to generate enough cashflows in our portfolio to service this debt. Our assets will be taken away, and our horizons are immediately truncated. Overpaying is another problem: if you overpay something by three times, you might have to wait 100 years to get your return, or you may never get one.

And lastly, to have the right process in place, you need the right culture. This is where advisors can play a vital role. This includes communication; talking to your stakeholders; and aligning ex-ante not ex-post.

For example, at GIC, I encourage my team to rename non-investment grade bonds to ‘high-risk’ bonds, because it’s important for stakeholders to know that bad things can happen as these bonds are high-risk. Doing this upfront prepares stakeholders, so that they won’t be caught unawares should something negative happen.

Market uncertainties

1. Macro 

A year and a half ago, we emerged from a very long bull market that lasted more than 10 years 4. There were many signs, including heightened interest in SPACs (special purpose acquisition companies), cryptos, and meme stocks; as well as huge fundraising and deal volumes. Markets saw a sell-off in 2022, and then a recovery this year.

The prospect of higher-for-longer interest rates is clear due to sticky inflation and bond oversupply. Years of central banks printing money and massive fiscal injections have left us with a lot of bond issuance; and the demand that was previously provided by central banks has ended, as they are tightening, not easing. Additionally, high interest rates are posing valuation challenges and financing constraints: higher financing costs also eat away at bank profitability.

There are, of course, opportunities as well. Some assets are again performing. For example, 20-year US inflation-linked bonds (TIPS) were yielding +2.4% in September 2023 5 compared to -0.76% 6 18 months prior. Another area is credit financing, where some credits are offering equity-like returns.

2. Geopolitics

Expect more fragmentation and friction, and less efficiency. Supply chain realignment will continue, as will investment restrictions, and restrictions on technology transfer and knowledge-sharing. These developments are negative for both growth and inflation. Furthermore, they dampen beta, as they reverse a lot of the gains from the past. However, these events should also create dislocation opportunities. Some regions and countries are beneficiaries, including India, Southeast Asia, and Mexico. Diversification is important in a world that is geopolitically divided.

3. Technology

Digitalisation will continue, as too will the proliferation of AI. In the words of a speaker at GIC’s Bridge Forum earlier this year, AI is an 80-year overnight phenomenon: The technology has been around for 80 years but became mainstream in November 2022 when ChatGPT was released to the public 7. While the technology isn’t new, its impact could be significant due its potential for long-term transformation.

Investors need to be cautious about overheated sectors. There are many start-ups with new business models which are surrounded by a lot of hype. But we need to stay invested in long-term plays including infrastructure providers and platform companies. We also need to be alert to where value is being captured. Many user organisations claim they have made efficiency gains, but a lot of the time, they end up paying these gains to software providers.

4. Climate change

Finally, climate change; another enduring – and deteriorating – phenomenon requiring sustained and large-scale solutions. GIC is focused on two parts of this universe: green tech, and transition finance. We face practical challenges, however. For example, we have to address the trilemma of affordable energy, energy security, and sustainability to accelerate the energy transition. It isn’t easy to hit all three goals at the same time.

Tackling climate change also presents a significant opportunity for long-term capital deployment. First, we can increase the supply and storage of green energy. At GIC, we have invested in companies like ACEN, Greenko, and InterContinental Energy, who are producing clean sources of energy and fuel such as renewables and green hydrogen. Second, we can reduce demand for fossil fuels through use of smart meters, for instance. GIC has invested in Genus Power, an India-based company, which will participate in India’s effort to roll out 250 million smart meters over the next two years. A third way is do both, and create tech-enabled assets. An example of this approach is H2 Green Steel, which aspires to reduce the amount of carbon emitted during the steel manufacturing process by 95%, by using green hydrogen and digital manufacturing.

Focus on the destination

Long-term investing across generations is possible, even in this age of volatility. History taught us that we need to be clear about our goals, pursue a long-term strategy, and adopt robust processes. With these, we can navigate the journey of profound uncertainties in macro, geopolitics, technology, and climate change.

— Lim Chow Kiat, CEO, GIC

A friend of mine who owns horses once told me that when you ride horses or when you are driving a horse-pulled cart, you have to get the horse to look into the distance, and not focus on its immediate steps; otherwise, the horse will lose its rhythm and steps. So as we execute from day to day, we must keep our eyes on the horizon to keep our pace steady, and do the best job we can.