Speech by Mr Lim Boon Heng, Chairman of Temasek, to the 4th Annual Sovereign Wealth Fund Conference

Sim Kee Boon Institute for Financial Economics, Singapore Management University, Singapore

Professor Arnould de Meyer, President, SMU
Pascal Blanqué, Deputy CEO of Amundi

Good morning, Ladies and Gentlemen.  It is my great pleasure to be here today to share some perspectives with you from Temasek.

At the outset, I’d like to take a few moments to describe what Temasek is.

There are some key differences between what we are, and the make-up of a typical Sovereign Wealth Fund or SWF. You will understand what I mean when I elaborate.

To start with, we own our assets outright as a commercial investment company, governed by the Singapore Companies Act.  We are not a fund manager for the Singapore Government.

And as a commercial investment company, we pay tax; no different from other companies. Most SWFs claim sovereign immunity and pay no taxes.

We also distribute dividends to our shareholder.  This is based on our Board’s assessment of our needs for re-investment and a fair cash return to our shareholder.

This is no different from our relationship as shareholder with portfolio companies.  They too have their own dividend policies, balancing the interests of their shareholders and the needs of their businesses.

While the Singapore Government is our sole shareholder, we operate as an independently-managed commercial investment company.

The Government is not involved, nor are they consulted, on our investment, divestment or other day to day business decisions.

The Government does not guarantee our debt; we, in turn, do not guarantee the debt of our portfolio companies.

Our Board is substantially made up of independent Directors, mostly from the business community.  We have two Directors who are from overseas.  We have no representative of our shareholder on our Board.

So, how did we begin?

We started life owning a mixed bag of investments, as diverse as a bank, a bird park and a detergent company.  Their origins varied.

For instance, one business was a former British naval dockyard being converted into a commercial ship repair company.

We grew and evolved with Singapore, contributing to Singapore’s growth.  We also benefited from that growth, especially during our first two decades of life as an investment company.

Our investment funds come mostly from the dividends we receive from our portfolio companies, plus the divestment proceeds from our own investment activities.  These are supplemented by bonds and bank borrowings.

We do not have the luxury of commodity wealth: no oil, no gas, no minerals, no agriculture.  Every dollar we earn comes from the hard work of thousands of people in our portfolio companies over many decades.

Many of them have become regional and global businesses.  Companies like Singapore Airlines are now global brands, known for service excellence.

In many countries, there are benefits to being a sovereign investor.  Collectively, we are generally perceived as solid and bringing a positive contribution to an investee company’s shareholder register.

However, there is also another view that sovereign investors invest for strategic reasons, as an instrument of the home government’s foreign policy, or to secure supply of goods and services to the home country.

To remove the layer of mystery, and play our part as a responsible stakeholder of an integrated and connected world, Temasek took the decision 10 years ago to publish our annual review, subject ourselves to the discipline of credit rating, and take on the responsibility of issuing international bonds.


Defining Temasek

Defining Temasek is not easy; we have not found another entity that does exactly what we do.

Among many other sovereign investors who may be in this room, we would be different to almost all of you in substantial ways.

Most SWFs invest in broadly liquid and globally diversified portfolios.

We are mostly an equities investor, what some would describe as a long equities investor.   In essence, we invest in companies with strong management and a positive outlook.

We have set ourselves an ambitious goal to generate returns in excess of our risk-adjusted cost of capital over the long term.  This hurdle is driven bottom-up, and aggregated over our portfolio.

Over the last ten years, our cost of capital was between eight and nine percent per annum.  This number has dropped in recent years, as the various Asia economies upgraded from sub-investment grade into investment grade, thus lowering our risk hurdles.

As almost all our holdings are in equities, there is much greater volatility in the value of our portfolio.

Our expectation of higher long term returns from our investments in shares of companies comes at the price of higher year to year volatility and greater investment risks.

We have no requirement to maintain a globally diversified or liquid portfolio. 

This means we have the full flexibility to take concentrated risks, whether in owning up to a 100% of a portfolio company, or in deploying most of our investments into a concentrated geography.

For instance, we started life invested almost wholly into Singapore.  Today, we are mostly concentrated in Asia, including Singapore, with about 25% exposure to the OECD countries.

This is very different from most SWFs, which aim to have globally diversified portfolios outside of their home economy.


A Disciplined Focus on Long Term Returns

As a long term owner, we have the capacity and capability to take long-term positions, and ride through cycles of market volatility.

We also have the flexibility to preserve our position in cash, waiting for the right opportunities.  These are two important characteristics that define Temasek.

We are not a private equity firm.  There is no redemption date by which we have to pay investors back.  A redemption date fixes asset managers on the need to work backwards on the timing to extract value.

We have no pressure to sell if the long term outlook remains positive.

We don’t focus on quarter to quarter returns.  We are not fazed by year to year volatility in our returns.

We track the performance of our portfolio over the longer term: five, ten, even twenty years.  This discipline of investing for the long term is very important to us.

Yes, we track and report our performance annually, even when there is no requirement to do so.  It is part of the discipline which we impose upon ourselves and our future generation of management.


Prudently managing risk

Investing is, by its nature, a risk.  Investing in equities means that risk is likely to be higher than other, more conservative, forms of asset classes.

However, our expectation of returns is also higher.

In our annual review, we share a perspective on risk.  We use simulations to derive the different probabilities for different levels of returns over different periods.  This distribution of returns probability takes into account our portfolio mix and market conditions at a point in time.

We acknowledge that risk is inherent in the business of investment.  However, there is also a risk in doing nothing.

Returns available to us by actively investing could be lost if we did nothing.

Of course, sometimes in certain market conditions, doing nothing may deliver better returns than doing something.  We know we don’t have a monopoly on 20:20 hindsight!

As at March 2013, Temasek’s portfolio was valued at S$215 billion.  In US$ terms, this was 10% higher than the previous year.

Much of our portfolio is held in listed securities, and is therefore valued on a mark to market basis.  Unlisted securities, about a quarter of the portfolio, are valued at book.

In managing our portfolio, we sometimes choose to sell even when it would record a realised loss.

Sometimes, this is because we exercise a discipline to take money off the table where it isn’t working for us the way we want it to.  At other times, we could have alternative investment opportunities with expectations for better returns.

Or in some cases, we may have a view of the macro environment, and the divestment at a loss would help raise and preserve the cash for the right opportunity to come along as the expectations of the macro environment unfolds.

By subjecting ourselves to the mark to market principles, we remove one layer of natural human reluctance to sell investments at a loss.

Hopefully, this helps us to be resilient and disciplined to ride the inevitable cycles of volatility: indeed, to look at them for the buying opportunities they may present.


Why Governance Matters to us

I’d like to spend a few moments on the principle of governance.

The founding of Temasek itself was premised upon the separation of government roles from that of a commercial shareholder.  This signals a clear separation of roles and responsibilities.

In other words, the founding of Temasek was premised on the principles of sound governance and long term commercial sustainability.

At the outset, I mentioned that our shareholder does not direct our investment, divestment or other business decisions.  That freedom from shareholder or political interference is something we guard, but we don’t take for granted.

Likewise, it has taken enormous wisdom and discipline on the part of the Singapore Government, since independence, to clearly separate its role as shareholder from its role as policy maker for the larger good of Singapore.

For instance, from the Government’s perspective, the larger good of making Singapore a vibrant air hub, well connected to the world for business and survival, takes precedence over the interests of Singapore Airlines as a company.

For example, Qantas has been given a license to set up an entity called Jetstar, based here in Singapore.

Yes, Singapore Airlines, in turn, contributes critically to the success of the Singapore air hub.  The airline knows that it has a responsibility to develop and grow as a viable and sustainable business, thereby contributing to and benefitting from Changi’s success.

This clear separation of roles and responsibility is why we have set out, in our Temasek Charter, a statement of our purpose.

It prescribes Temasek’s role in three pillars.

First, we are an active investor and shareholder.  We own and manage our assets based on commercial principles.

We actively shape our portfolio by increasing, holding or decreasing our investment holdings. These actions are driven by a set of commercial principles to create and maximise risk-adjusted returns over the long term.

Our portfolio companies are in turn guided and managed by their respective boards and management.

Just as our shareholder does not direct our business decisions, we do not direct the business decisions or operations of our portfolio companies.

As an actively engaged shareholder, we promote sound corporate governance in our portfolio companies. This includes the formation of high calibre, experienced and diverse boards.  And about a third of the Directors of our portfolio companies are from overseas.

We generally do not appoint nominees to the boards of our portfolio companies; rather, we work with Boards to identify talented, highly qualified individuals who can act in the interests of the investee company.  We do this with our Singapore portfolio companies as well as companies outside Singapore.

Second, we are a forward looking institution.

We foster an ownership culture built on integrity.  We put the institution above individual, emphasise long term over short term, and align our employee and shareholder interests.

Put simply, we do things today with tomorrow in mind.

Our staff compensation philosophy is very much aligned to this principle.

Long before the global financial crisis, we had in place a system of long term incentives which defer incentives to as long as 12 years, with a system of clawbacks if performance was not sustained.

Such long term alignment is meant to reinforce a sense of ownership.

And finally our third pillar as a trusted steward, striving for the advancement of our communities across generations.

We engage our communities based on the principles of sustainability and good governance.

We support community programmes that focus on building people, building communities, building capabilities and rebuilding lives in Singapore and beyond.

We engage stakeholders in the development of sound governance practices.

For instance, although not a sovereign wealth fund in its strictest sense, we played an active role in partnership with other SWFs and regulators, to develop the Santiago Principles.

As you know, these principles guide SWFs and investment recipient countries in terms of the best practices and principles of good governance.

In addition, under the Singapore Constitution, we have a responsibility to safeguard our past reserves.

Part of the reason for this constitutional protection of past reserves is to ensure a fair sharing of returns between the current generations and future generations.

Hence, we also see ourselves as intergenerational stewards, investing for the present as well as future generations.

The principles I’ve just enunciated guide us in everything we do.

They guide how we think about corporate governance.  When you hear these principles, you can understand why we advocate concepts like separation of Chairman and CEO roles in companies, and the appointment of fewer executive members of Boards and more independence for Boards.


How Temasek benefits Singapore and Singaporeans

Throughout my remarks today, you will have heard a focus on the long term.  It leads to a reasonable question: what about now?

Temasek makes substantial contributions to Singapore, and to our neighbourhood.

Take the Singapore Government budget as an example.

On the revenue side, the Singapore Government’s budget benefits from a line item it calls Net Investment Returns Contribution, or NIRC.  This line includes returns from Temasek and GIC, among others.

From us, this includes the dividend we distribute to our shareholder each year.

NIRC provides revenue for the Government that it uses to provide various social programmes to the Singapore community.

The Government’s primary budget funds core activities from taxation and other fees and charges that it collects.  The core government functions include activities such as defence, health, domestic security, education and the like.

Beyond these basic government functions, the Singapore Government also introduced social programmes to help the needy, or those at risk for one reason or other, such as the disabled or the elderly.

If you look at the budget numbers especially over the last 10 to 15 years, the contributions from GIC, Temasek and other investment returns have enabled the Singapore Government to fund transfers and redistributions to support the elderly, young and needy for education, healthcare and other services, and still maintain a light tax burden on the economy and the working population.

In short, the Singapore Government collects about 15%of the GDP in the form of taxes, fees and other charges.

The net investment returns contribution from the likes of GIC, Temasek and others comprise about 2.2% to 2.6% of GDP.

In budget terms, this adds about another 15%2 to the Government budget revenues, and enables the Government to support its social programmes without having to raise taxes.

Thus, the taxes which Temasek pays, and the dividends we distribute to our shareholder, are used by the Singapore Government to help Singaporeans today, even as Temasek keeps its focus on delivering long term returns.

Another way is to directly fund various social investments ourselves.

In 2003, we made a commitment to share a portion of our returns in excess of our cost of capital to directly support community programmes.

We do this through endowments.  These endowments support programmes, not just for one, two or three years, but for the longer term.  They focus on areas of need, and aim to build capabilities.

Just an example - one of these endowments provides scholarships for people from broken homes, to allow them to reach their potential without compromising their education because they have to support parents and siblings.

Since our inception in 1974, Temasek has contributed over S$1.5 billion to such community causes.  Temasek has set up various non-profit organisations to use the endowment funds to build people, build communities, build capabilities and rebuild lives.

The boards and management of these non-profit entities have quietly contributed to the social fabric of our communities and people in Singapore and across Asia, day in, day out.

Temasek Cares for instance, has supported over 14,000 people over the last near-five years through its programmes for single parents, elderly and others in need.

Ladies and gentlemen, today I have sought to give you an insight into Temasek, how we think, how we think about investments and the discipline with which we measure ourselves, and how we wish to contribute in different ways to a better world for Singaporeans and non-Singaporeans alike.

I want to assure you all that Temasek values the trust in which it is held by the Singapore community, and more widely by the companies in which we invest as well as by the larger community around the world.

I am very touched when I hear many international friends, partners and regulators hold Temasek in high regard.

We value interactions such as this conference, so we can meet more people who are interested in what we do – you never know, maybe a few of you will want to come join us and help us in our mission!  We’re always open to those possibilities too!

I wish you all very well in your deliberations and activities, and for those of you visiting Singapore, I trust you will also take the opportunity to see more of our wonderful, and ever-changing, city.

Thank you for having me here with you this morning.



1 14 -16% {Mar 10-13}

2 14 -18%


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