Singapore's sovereign wealth fund posts robust returns but says inflation remains 'sticky'

Singapore's sovereign wealth fund GIC posted robust returns, its highest in eight years — but warned that "sticky" inflation has made it "more critical and challenging" in generating real returns. 

The fund recorded an average annual return of 4.6% over the past 20 years, for the year ending March 2023. It was the highest since 2015, according to its annual report released on Wednesday.

That's compared with 4.2% over the same period a year ago. GIC doesn't publish annual results.

Still, the fund cautioned the global economy faces headwinds from tight monetary and fiscal policies.

While headline inflation is beginning to ease, "underlying inflation remains sticky," said the fund in its report. "This could force central banks in core advanced economies to keep policy rates elevated for longer to bring inflation closer to target levels."

GIC, with an estimated with $690 billion in total assets, is the world's seventh-biggest sovereign investor, according to Sovereign Wealth Fund Institute, a research firm.

The U.S. continues to make up the bulk of GIC's portfolio at 38%. This is followed by Asia, excluding Japan, at 23% and the eurozone at 9%.

Emerging market equities in GIC's portfolio rose to 17% by end of March from 16% a year ago. Real estate rose to 13% from 10%, while nominal bonds and cash dropped to 34% from 37%.

GIC, a private firm wholly owned by Singapore's government, manages Singapore's reserves together with the Monetary Authority of Singapore and state investor Temasek Holdings.

Looking ahead, the firm said investment outlook remains highly uncertain and elevated borrowing costs are not ideal for financial returns or valuation.

In his letter to stakeholders, GIC chief executive Lim Chow Kiat warned, "We are not out of the woods yet."

"A potential structural shift to a regime of higher interest rates and the impact of generative AI are two new disruptions to grapple with," he added.

The fund's top priority is to increase resiliency to protect its portfolio from inflation, and GIC intends to double down on investments that provide stable long-term returns like real estate and infrastructure.

While the resulting higher prices of capital will benefit long-term investors, the CEO said, the transition to a "higher interest rates world will be difficult for many businesses and even countries," Lim noted

"Those with business models reliant on very low interest rates will need to make significant, and sometimes painful, adjustments," he added. "Even their viability may be in doubt."