A few days ago I received a copy of a paper appearing in the journal World Economics from Friedrich Wu a professor at the Nanyang Technological University in Singapore about his recent research on Temasek. Now before I talk about the paper, I want to emphasize something. I had never seen this paper before a couple of days ago, never corresponded with Dr. Wu before the other day, or provided any input on the paper.
To most in Singapore who know about Temasek, much of the material will be familiar with a significant portion of the material covered. The strengths of this paper, and worth reading to even the knowledgeable Singaporean reader, are its analysis of the shift in investment strategy prior to the 2008 global financial crisis and the subsequent changes in their capital allocation. The paper notes among other things that:
“The GFC highlighted Temasek’s overexposure to the financial services sector. This could have prompted it to decrease the share of its holdings in this industry from 40% in 2008 to 31% in 2013… Standard & Poor’s, however, insists that Temasek is still overexposed to financial services.”
The paper also notes the relatively higher level of political risk Temasek accepts. Not only is Temasek filled with PAP party favorites and relatives, but its investments are increasingly tied to political questions. The recent failure of the Indonesian bank take over which the Indonesian government tied to opening up the Singaporean banking market, something the Singaporean government refused, fail to assuage foreign governments that Temasek is a purely commercial government owned enterprise. Though Temasek appears to have gotten a good deal in its purchase of Watson’s Drug from Hong Kong tycoon Li Ka-Shing, it won’t comfort Singaporean’s to others to note that Mr. Li said in a press conference that “the transaction wasn’t based solely on pricing…”.
Prof. Wu even mentions me fairly writing about my work that “As Temasek is not required to file its audited financial statements with the public registry, there are no concrete means of ascertaining the validity of either Temasek’s TSR claims or Balding’s argument.” I think is an entirely fair statement to make because until Temasek actually reveals information about its financials and returns, we cannot make a definitive assessment of the truth of their claims. I believe very strongly that the overwhelming evidence supports the idea that Temasek has not and continues to misrepresent its long term returns and financial health, but that we cannot know with absolute certainty at the moment.
I believe there are two fundamental problems, which to this date neither Temasek nor anyone defending them, have been able to address. First, Temasek is claiming long term annual returns which are double what virtually every stock market in the world has earned. Add that up since 1974, the year of Temasek’s inception, and the differences are just enormous. Let’s begin by looking at Figure 1 which plots major stock markets and Singapore stock returns since 1974.
As you can see, most stock markets have returned pretty similar annualized rates of return which average out to 7-8% annually. Hong Kong with its own rapid expansion and then the inflow from Chinese listings is the outlier, coming in at 9% annually since 1974. Now let’s put it into perspective, just how large a difference Temsek is claiming below in Figure 2.
Temasek is claiming not that they did a little better than every major stock market, and the Singaporean index, since 1974 but that they simple obliterated it. According to Temasek they beat indexes every year by a factor of about 2 to 1, which over 40 years adds up to Temasek beating global stock by a factor of nearly 20. This is truly astounding performance and Temasek should just start giving investment lessons to Warren Buffet and every other investor in the world.
The second major problem is the large public surpluses and investment capital from CPF that has flowed through the Singaporean public purse. Since 1974 Singapore in adding up operational government surpluses and investment capital from CPF, received more than $700 billion SGD in total yearly inflows. Temasek and GIC claim they have earned 16% in SGD terms and 7% in USD terms over the long run. Astoundingly, the Singapore balance sheet as of March 31, 2012 listed only $765 billion in assets.
The discrepancy between the financial assets Singapore has and should have based on the inflows it received, is enormous. If GIC and Temasek are earning what they are claiming, even after subtracting out currency losses and interest on CPF capital to savers, Singapore should have approximately double the financial assets it lists on its balance sheet. This is not unique financial theory but simply the laws of mathematics and the public data provided by the Singapore government. Surpluses do not disappear and investment capital from CPF has to go somewhere.
I am sure that Temasek senior management thinks I am a quack. However, this merely pushes me on because I know that they could prove me wrong and embarrass me easily by proving me wrong with minimal data releases. They have chosen not to because, as I strongly suspect, they know that the evidence supports my version of events, even if imperfectly, much more than their version. I have offered time and time again to publish a full retraction and apology to the Singaporean government, Temasek, and the Singaporean people if Temasek can provide data that proves I am wrong. They have not.
You be the judge of what they believe that means.