TEMASEK HOLDINGS

TEMASEK HOLDINGS:

(Sale of Bank of America shares): 1.

Mr Inderjit Singh asked the Minister for Finance (a) how much loss did Temasek incur by the sale of Bank of America shares; (b) in light of recent statements that any losses were just paper losses and that Temasek intended to hold the shares for the longer term, was the Minister surprised that Temasek went on to sell the shares so quickly; (c) does this show a shift in Temasek from being a long-term investor to a short-term one; and (d) whether Singapore has over-invested in the global financial sector at an inopportune time and what can be expected from Temasek and GIC on other banking shares they have recently invested in.

2.

Ms Sylvia Lim asked the Minister for Finance what is the rationale for the sale by Temasek Holdings of its shares in Bank of America at a significant loss.

The Minister for Finance (Mr Tharman Shanmugaratnam): Mr Speaker, Sir, Mr Inderjit Singh and Ms Sylvia Lim had filed questions about Temasek’s rationale for the sale of its shares in Bank of America (BoA). Temasek has since explained why it did so in its letter to the press last week. I will summarise Temasek’s reasons.

Temasek invested in Merrill Lynch in December 2007. Following the completion of BoA’s offer to buy Merrill in January 2009, Temasek’s investment was converted into BoA shares. Temasek reassessed the case for holding on to the investment for two reasons. First, the acquisition of Merrill by BoA meant a different investment proposition for Temasek, with different implications for the risk profile of its overall portfolio. The investment thesis had changed, from the original focus on Merrill’s specific businesses to BoA’s linkage to the broader US economy. Second, Temasek also assessed the risk-return environment to have changed substantially. It decided to divest the BoA stake after considering all relevant factors.

The sale of its BoA stake does not signify a shift in Temasek’s investment orientation from long-term to short-term. Temasek is a long-term investor, not a short-term trader of assets. It generally goes into investments expecting to hold them for some time – and this was indeed Temasek’s intention when it invested in Merrill. But being a long-term investor does not mean being locked into every individual investment, regardless of major changes in the environment or a new investment proposition. Rather, Temasek regularly reassesses the risks and potential returns on its investments, and rebalances its holdings when it considers necessary to enhance the long-term value of its overall portfolio. This means that Temasek may divest an investment, even at a loss, to get a better mix of risks for its overall portfolio or to position itself to take advantage of opportunities elsewhere. Such rebalancing is a standard practice and discipline amongst long-term investors. The real difference is that the calculation behind any rebalancing of the portfolio is not aimed at short-term returns, but the long-term value of the portfolio. If Temasek had indeed been motivated by short term results, it would surely not have decided to sell BoA at this stage and realise a loss.

The premise behind the questions being asked, and the comments by some other members in the course of this week’s debate, is that Temasek has been on a losing path, and Singapore is poorer for it. This is simply not the case. Temasek has made losses on some investments, including its investment in Merrill/BoA. It has made gains on others. The only reasonable way of evaluating Temasek's performance, therefore, like that of any large investor, is to look at how the losses and gains add up, and how its overall portfolio performs over time. The facts are that Temasek has produced strong returns on its overall portfolio over time – taking the investments that have done well with those that have turned bad; and taking the boom years with the subsequent years when markets went bust. Temasek has, in fact, made large investment gains over the course of the market cycle that began in 2003, including the boom that lasted till 2007 as well as the subsequent bust.

Second Minister Mrs Lim Hwee Hua had earlier provided Parliament with information on Temasek’s losses between the end of March 2008 and November 2008, when global markets went down sharply over that period. Temasek’s portfolio value declined by S$58 billion over the period, or by 31%. I would add that a large part of this arose from the decline in value of Temasek’s investments in Singapore. Of the S$58 billion decline, S$32 billion was attributable to the drop in market value of just the 10 largest publicly listed Temasek-linked companies (TLCs) in Singapore. So just those top 10 TLCs accounted for S$32 billion of the total S$58 billion lost between end March 2008 and end November 2008. The share prices of these 10 TLCs – this is not the total Temasek portfolio in Singapore but just the 10 alone – declined by about 41% on average over the period, in line with the movement of the Singapore market as a whole.

What matters, however, is not how Temasek did in this last year when the markets were in collapse, but how it has done over the cycle as a whole. The S$58 billion decline in value between March and November 2008 came after a much greater gain in Temasek’s investment portfolio of S$114 billion over the preceding five years, from the time the market cycle began in 2003. This means that even after taking into account the recent sharp decline, Temasek’s portfolio had still grown by S$56 billion over the course of the cycle. This is after netting off all capital injections into Temasek – from Government to Temasek – as well as dividend payments to the Government. The S$56 billion gain, therefore, reflects only the returns on Temasek's investments. So, I will repeat the figures – the S$58 billion decline that we saw between March and November last year at the time of the sharpest market correction came after a much greater gain of S$114 billion from the time the cycle commenced in 2003 up until March 2008. The net gain, therefore, was S$56 billion over the course of the cycle as a whole – boom plus bust.

Temasek has been transparent about its overall portfolio performance, which it publishes each year in the Temasek Review. The full year accounts to end March 2009 have not been audited, but the picture should not be fundamentally different from what I have described as equity markets globally showed no major change as at end March 2009 compared to end November 2008. The sale of the Merrill/BoA investment would not have aggravated the results either, as the position I have described up to November 2008 takes in all unrealised losses, including the mark-to-market losses on the Merrill investment.

Compared to any relevant market indices, or to other reputable institutional investors, Temasek has performed respectably. Temasek has achieved total shareholder returns by market value of slightly over 15% per year on average in US dollar terms over the cycle. This is the cycle – again to repeat – that started in March 2003 until November 2008. Fifteen percent per year average returns. This compares with a 6% annualised gain in the global equity market indices, if you take MSCI World, for example. Or if you take a weighted index of global, Asian and Singapore equity market indices – since Temasek has a significant investment in Singapore and Asia, not just the world – if you take a weighted index of the three market indices together, it would have delivered more than 6% but still significantly less than Temasek’s gains of 15% per year. Temasek’s annualised returns are also higher than what several other well-regarded investors have earned over the cycle.

But while Temasek has performed better than many other large investors over this six-year market cycle, it is not realistic to expect it to outperform in every cycle. It is also not realistic to expect it to avoid losses on every individual investment, or losses on its overall portfolio when the markets go through sharp corrections. Temasek, like GIC, takes very seriously every decline in the value of its portfolio, or in the value of its individual investments. But it will have to keep to its discipline – of being prepared to take calculated risks on individual investments, maintaining a diversified portfolio, rebalancing its investments when necessary to optimise the risk-return profile of the portfolio and keeping its sights on achieving long-term returns. That is how Temasek has operated successfully over the last six-year cycle, making good gains in its portfolio, and it is how it will seek to deliver good returns over the long term.

Mr Inderjit Singh (Ang Mo Kio): Mr Speaker, Sir, I would like to thank the Minister for the reply. I would like to ask – given that the environment is uncertain and that we cannot expect the same type of returns moving forward and also the seemingly changed investment philosophies for both Temasek and GIC – is there a plan for the Minister to review and to issue new guidelines for GIC and Temasek for future investments.

Mr Tharman Shanmugaratnam: I appreciate where Mr Inderjit Singh is coming from in this question and he had also made a similar comment earlier in the course of this week's debate.

There is a distinction between Temasek, GIC and, for the matter, the Monetary Authority of Singapore (MAS), which is also part of our whole-of-Government assets. The MAS is, at one end of the spectrum, the most conservative because it is a central bank, with very significant holdings in fixed income instruments and liquid instruments. GIC has a globally diversified portfolio spread across asset classes, chiefly in the public markets and a very much smaller component in private equity and alternative investments. So, a fairly conservative, large, globally diversified investor. Temasek is at the other end of the spectrum – very largely an equity investor, a value-investor aiming at long-term returns; significantly higher risk than GIC or MAS but, not unexpectedly, has delivered higher returns over time.

The high-risk end of the spectrum will be a more volatile end of the investment performance spectrum as well but we expect it to deliver higher returns over the long term. The low-risk end of the spectrum will be more stable but with lower returns over time. So within Government, we look at it as one whole portfolio. Each board makes its own decisions on asset allocation but we do add things up and review the matter regularly. What is the overall profile of risk on our whole-of-Government assets? Are there significant concentration risks that require us to go back to the boards and inform them about? Are there adjustments that need to be made?

But I can assure Mr Inderjit Singh that this is not an auto-pilot system where you have three separate entities doing their own thing and the Government does not know how it is added up, or what risks are accumulating. There is a sense in which we have three agencies at different parts of the investment spectrum, engaging in different degrees of risks, different areas of global exposure. It has performed well so far. If you look at the whole-of-Government assets, it has performed well so far. And the individual entities – in particular, we are talking today about Temasek – has performed much better than the average investor, the average large institutional investor, and even compared to some of the most reputable names.

So we will keep reviewing this. It is not something that is being done on auto-pilot within Government. We will keep reviewing it from time to time. We have a governance structure for looking at our whole-of-Government assets within the system. And I can assure Mr Inderjit Singh that where we need to review, we will review.

Ms Sylvia Lim (Non-Constituency Member): Sir, supplementary questions for the Minister. Could the Minister enlighten the House – during the December stockholders' meeting when the merger with BoA was discussed by Merrill Lynch stockholders, did Temasek vote for or against the merger? If it voted for the merger, why was that the case? Secondly, could the Minister also tell the House why Temasek felt the need to divest its entire stake in BoA all at once, instead of staggering the divestment and, in light of what we know of BoA value/shares now, the loss would have been significantly less if there had been some staggering of the divestment?

Mr Tharman Shanmugaratnam: On the first question, I am not aware of how Temasek voted at the shareholders' meeting in December in relation to BoA's acquisition of Merrill. I have not asked and I have not found it important to ask. These are matters on individual investments that are left to the boards of the respective investment agencies. And that is a very important discipline we have to maintain. It is not that each investment is unimportant. Every investment counts and, all of us, when we read about the loss in the papers, we are always concerned. I hope we also take equal note of gains that are being made. The discipline is that of looking at an overall portfolio, studying its returns over relevant periods of time not short periods of time. That is a discipline we have to maintain.

That is the way we look at it within Government and we try to ensure that the boards know that we are not peering over each of their decisions on individual investments because it will cramp them. They have got to diversify as best as they can, make their risk decisions as best as they can and they are accountable for overall returns over time.

Mr Speaker: Yes, Ms Lim, last question.

Mr Tharman Shanmugaratnam: I am sorry, Mr Speaker, Sir, I have not answered Ms Lim's second question.

Again, on matters of timing, my response is the same. These are matters for the boards to decide. In retrospect, we will always be able find investments which were sold too early and if they could have been sold in phases, might have yielded more. For that matter, investments which may have been sold too late. So, it will not be possible for us as a Government, and I really urge Members also not to try, to be in the habit of looking at each investment in retrospect and seeing what we could have made more of a gain or less of a loss. Let us look at the overall performance of the portfolio. I can assure though that Temasek and, for that matter, GIC do look at each individual loss very carefully and try to learn lessons from it. It is not possible to time the markets perfectly in these things and when you are having to make a major risk decision, you have to go about it in a highly disciplined fashion and not hope to time week by week, day by day, every move.

Mr Speaker: Yes, Ms Lim, last question.

Ms Sylvia Lim: Sir, a follow-up to the Minister's last answer. Sir, the public is trying now to assess Temasek's explanation of why it divested its stake in BoA/Merrill Lynch and the answer that came from Temasek was that to continue in BoA would be against the investment thesis that Temasek had first embarked on. So, would the Minister not agree that it would be in the public interest now for the public to know whether during that stockholders' meeting, Temasek actually voted against the merger – which will be consistent with Temasek's answer now – or if it had voted for the merger, then I think further explanation would be required?

Mr Tharman Shanmugaratnam: Actually, that is not necessarily the case. Let me repeat first that I do not know how Temasek voted at the meeting. Had it voted for the merger, it is not necessary the case because it intended to hold on to the investment for the long term. That does not necessarily follow.

Mr Speaker: I think question two has been answered by the reply. Can we go to the next question, please? Mr Inderjit.