The Temasek Illusion
Illusion depends on directing the viewers attention to what the performer wants Share the viewer to see rather than what they need to see. When the trick is revealed the viewer having missed the important action due to the deliberate misdirection is amazed at the performers revelation. The latest Temasek annual report engages in this exact type of misdirection designed to focus attention away from the important points.
I must begin by emphasizing, as I always emphasize, that Temasek is only a piece of the whole puzzle. It is a major and important piece of the whole puzzle, but it is again only a piece of the whole puzzle. As I have already noted, even if everything Temasek claims about its returns is completely true, which is a dubious proposition at best, this does not in any way relieve the concern about the entirety of Singapore public finances.
The first basis for analysis is how an investor fared against the broader market. While Temasek is quite proud of its 8.86% total shareholder return between March 31 2012 and March 31 2013, this is less impressive than it appears. Over the same time period, the S&P 500 and FTSE returned 11.4% and 11.2% respectively. The Strait Times and the Hang Seng returned 9.9% and 8.5%. In other words, if Temasek only bought low cost exchange traded funds using the same geographic diversification strategy, they would have earned a slightly higher return of 9.2%.
As is repeatedly noted in finance research, there is no such thing as anyone who out performs the market for an extended period of time. In a way, a large institutional investor slightly underperforming the market by .4% is reassuring because it is what we expect in that they matched the market. This is the major concern about Temasek’s enormous claims about their long term returns: they do not match the underlying data of individual holdings or markets they were heavily invested in.
For 2013 anyway, congratulations Temasek: you slightly underperformed the market!
More important however, is the evolution of Singaporean finances. The Singaporean government is in many instances, such as with SMRT, simply subsidizing the profits that accrue to Temasek via their portfolio holdings. Consequently, while Temasek makes money, the Singapore governments loses money, and the two numbers come close to balancing out.
Here is a simple table below that I have prepared using data from the Singapore Ministry of Finance Budget website of assets and liabilities going back to the year ending March 31, 2004. It should be noted that to the best of my knowledge, the government has not posted a balance sheet for the fiscal year ending March 31, 2013 consequently I have not been able to calculate the change for the most recent year.
There are two things that should be focused on. First, while Singapore investments increased from $313 billion SGD to $616 billion SGD between March 31, 2004 and 2012 public debt was exploding at the same time. During the same period, major liabilities jumped from $254 billion SGD to $494 billion SGD. This resulted in growth in net assets from $58 billion SGD to $122 billion SGD for a total increase of only $64 billion. To frame this slightly differently, according to the Singapore Ministry of Finance, while publicly held investments increased by $303 billion SGD between 2004 and 2012, this occurred primarily from an additional $239 billion in new liabilities with only $64 billion SGD attributable to net asset growth. Put another way, Singapore has approximately four times as much public liabilities as net investments.
Second, incorporating Temasek into our analysis further complicates an already worrying result. If we take Temasek claims at face value that their portfolio value grew from $90 billion SGD in March 2004 to $215 billion SGD in 2013, this creates an enormous problem: if we subtract out the Temasek growth from Singaporean net asset growth over this time period, we have a negative number of $44 billion SGD. This implies that if everything Temasek claims is entirely true, then the rest of the Singapore, Inc. portfolio lost a significant amount of money.
When you make the comparisons year by year, the results are even more problematic. Let me give you an example. For the year ending March 31, 2009, suffering the effects of the global financial crisis Temasek understandably reported steep losses taking their portfolio from $185 billion SGD to $130 billion SGD. This is where it gets strange. The Singapore Ministry of Finance budget balance sheet for the same period reports investments and total debt essentially unchanged from the previous year. This means that while Temasek was reporting a $55 billion SGD loss, the rest of Singaporean investment portfolio would have had to have made a $57 billion SGD profit to offset Temasek losses.
To put this number in perspective, while the S&P 500, FTSE, and Strait Times were returning -37.2%, -33.1%, and -38.5% respectively, very close to the Temasek return of -29.7%, the rest of the Singapore investment portfolio must have returned an absolutely amazing 18.24%! In other words, the non-Temasek Singapore investment portfolio managed to outperform the Strait Times index by 56.77%. Now unless the Singapore Ministry of Finance magically maintained an enormous short position on global markets in 2008 and early 2009, it seems incredibly unlikely that they managed to pull off what would truly be one of the most amazing trades in the history of mankind to end up with no net change in total investment or net wealth.
Temasek’s returns are in line with the broader market. What continues to concern is its enormous deviation from the historical norm of market returns and the discrepancies within Singaporean public finances. These issues remain unresolved and quite worrying.