GIC’s New CIO Takes on the World

August 30, 2013 by Loch Adamson

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LIM CHOW KIAT'S  loyalty has paid off at last. In February the 43-year-old fixed-income specialist took over as group CIO of powerful sovereign wealth fund GIC (formerly Government of Singapore Investment Corp.). For Lim, a Singaporean who joined GIC in 1993 as a graduate trainee and rose through the ranks to become deputy group CIO and president of GIC Asset Management, the subsidiary responsible for investing in equities, fixed income and commodities, just before to being named group CIO, the appointment marked the culmination of a sterling career. GIC is renowned for cultivating its own talent, and its new CIO is entirely homegrown.

When Lim started at GIC’s headquarters in Singapore, the state-owned investment company had just 200 employees. Twenty years later GIC commands a team of 1,200 in nine external offices from Mumbai to San Francisco (and will open an offce in São Paulo in 2014). GIC invests a global portfolio worth an estimated $279 billion thanks to discretionary annual contributions from the Singaporean government and strong performance over the past two decades. During that time it has posted an annualized real rate of return of 4 percent above global inflation.

Last year GIC launched a major strategic review and revamped its investment framework to better identify the drivers of long-term performance. The fund has since revised its portfolio structure so the investment team can isolate and more closely observe the return streams available from global markets (or pure beta), strategic asset allocation and skill-based, active strategies. Led by Lim, senior investment professionals still allocate the risk budget among internal and external active managers, but GIC’s modified approach allows it to fund new strategies through a combination of asset classes rather than confining them to one.

Identifying prospective investment opportunities — and nimble traders — is an ongoing task, but Lim, who has extensive experience in public markets, welcomes the challenge. In August the press-shy CIO discussed GIC’s views on structural risks in developed and emerging markets in an exclusive e-mail interview with Sovereign Wealth Center Editorial Director Loch Adamson.

Sovereign Wealth Center: What are the greatest risks you perceive in the global capital markets?

Lim: Global capital markets will have to get through two adjustments in the next two to three years, starting with the potential tapering of the Federal Reserve’s quantitative easing. While the recent market volatility was a good practice run, there is always an element of uncertainty when such an adjustment actually takes place. Post–financial crisis there has also been some loss in the broker-dealer community’s capacity to cushion market moves. So entities dependent on cheap credit or opportunistic funding would need to prepare for that. Second, the tapering of China’s credit expansion will likely hog the headlines and keep volatility elevated. While such an effort raises the long-term prospects of the Chinese economy, short-term financial market reactions are likely to be volatile and negative.

Do you have any confidence in the euro zone’s nascent recovery?

We have a very modest expectation of growth in Europe. The twin challenges of deleveraging and regaining competitiveness will likely weigh on the weaker euro zone economies for several more years. But there are bottom-up investment opportunities for long-term investors like GIC. For example, we recently invested with partners in a gas transport and storage infrastructure in France. While the macroeconomic picture is challenging, Europe has many assets and businesses that are competitive globally.

How does GIC view Asian markets?

Historically, GIC’s portfolio was very much focused on developed markets. Even though we began investing in China and other emerging markets as far back as the late 1980s, it was only in the early 2000s that we significantly raised our allocation to emerging markets. Besides public markets, we expanded into real estate and private equity, which necessitated setting up local offices. Today emerging markets make up about 15 to 20 percent of our portfolio.

Does the recent institutional pullback from emerging markets worry you?

For quite some time now, we have had a strong belief that emerging-market consumers will provide an important source of investment returns for the medium to long term. We believe that trend remains intact. This is not to say we will not run into short-term financial market disappointments from time to time. If you look back at the performance record of emerging markets, you see clearly that they have had large fluctuations in short-term returns. Indeed, we have just witnessed such a disappointment in the past three years, with broad emerging-market equities lagging developed-market equities by about 30 percent.

What obstacles does GIC confront when investing in emerging markets?

An additional challenge of emerging-market investing is finding the right vehicles. For example, poor corporate governance and high earnings dilution can put a lid on returns, and exposure to consumer-related growth sectors can be very limited when simply buying a country’s equity index. A strong grasp of fundamentals is needed. So our investors, internal and external, are constantly on the lookout for the best ideas to navigate.

Do you prefer to invest independently or to make co-investments?

GIC welcomes co-investing opportunities. We have had a long history of doing those, especially in the private equity space. Our real estate team has also partnered with leading industry companies in property projects. More recently, we also stepped up the effort on the public market front. In addition, we have formed a new group, the Integrated Strategy Group, or ISG, which has been set up to drive our efforts in opportunities that may come in unconventional forms or with cross-asset-class characteristics.

Do you seek out co-investors, or do they come to you?

We maintain contact with a wide variety of fellow investors, including sovereign and pension funds. On deals we do not have formal arrangements to coinvest but do find ourselves sometimes in the same transactions.

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