Temasek Holdings Pte’s long-term investing strategy will have to include more short-term and liquid assets after the government opened up the option to draw more funds from the state-owned investment company.
Singapore’s government is “now ready” to include part of Temasek’s capital gains in its annual budget as the country spends more on its subway network, airport, education and social security to support an aging population, Finance Minister Tharman Shanmugaratnam said Feb. 23.
“This will force Temasek to either hold more liquid assets and settle for the lower returns those imply, or to face losses when divesting less liquid instruments,” said Veljko Fotak, who researches sovereign wealth funds as assistant finance professor at the University at Buffalo. “Such a dramatic shift in distributions is inevitably going to affect Temasek’s performance.”
The inclusion of Temasek’s returns comes as Singapore posted its first budget deficit since the global financial crisis, when it started including partial investment gains made by the central bank and sovereign wealth fund GIC Pte. Last week, the city also raised its top income tax rate for the first time in decades as benefits for older citizens rise.
The government had held off taking into account Temasek’s capital gains because it lacked an established methology in projecting long-term returns for the state-owned investor, which takes “concentrated stakes” in companies. The change will allow the government to include as much as half of Temasek’s expected long-term real returns, including paper gains.
“More than anything else, I think you have to now start factoring in the draw that you’ll anticipate on an annual basis,” S. Iswaran, Singapore’s second minister for trade and a former Temasek managing director, said in an interview on Feb. 24. “And then you factor that in as part of your larger investment strategy.”
Temasek, which is owned by the Ministry of Finance, previously had to only pay as much as half of its dividends to the government. Iswaran doesn’t expect the change to be “huge” because the move has been planned since 2009.
Temasek reported a total shareholder return of 1.5 percent for the 12 months ended March 31, down from 8.9 percent in the previous year and an average 16 percent a year since its inception in 1974. Its assets rose to a record S$223 billion ($164 billion), helped by a S$5 billion capital injection from the government.
During the year, the company also invested more than twice the S$10 billion of asset sales, outpacing divestments for a fifth straight year, according to its annual report.
That may change as it needs to set aside more funds for the government. Song Seng Wun, an economist at CIMB Research in Singapore, gave the example that a total long-term real return of 4 percent on S$200 billion of assets would amount to S$8 billion, of which the government could draw as much as S$4 billion.
“They have to be more mindful of the announcement that requires them to contribute more to the government coffers,” Song said.
Any increase in its payout to the government won’t derail its long-term stance, Temasek said, adding that investment decisions are made by its board and management. The company’s chief executive officer is Ho Ching, the wife of Prime Minister Lee Hsien Loong.
“Temasek will continue to focus on delivering sustainable returns over the long term,” Jeffrey Fang, a spokesman for Temasek, said in an e-mailed response to queries. “The Singapore government is not involved in the investment, divestment or other business decisions of Temasek.”
The state investor is the biggest shareholder of half of the city-state’s 10 biggest publicly traded companies, including DBS Group Holdings Ltd. and Singapore Airlines Ltd. While it holds sizeable stakes in companies, it also regularly trades shares of smaller holdings, according to exchange and regulatory filings.
In the fourth quarter, the investment company sold shares of Alibaba Group Holding Ltd. as the company run by Jack Ma, Asia’s richest person, rallied following its initial public offering. Temasek probably made $300 million from the sale, according to Enrico Soddu, an analyst at Institutional Investor’s Sovereign Wealth Center in London.
“When times were good and the government had no immediate need for funds, Temasek could enjoy the illusion of independence,” Fotak said. “But now we are seeing mounting pressure on Singapore’s budget while, at the same time, Temasek has posted less than stellar returns over the recent years.”