GIC Fees are More than a Hedge Fund?

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The important thing about Singaporean public finances and sovereign wealth funds that even most Singaporeans fail to grasp is their absolute centrality to most any economic and even many social issues.  You simply cannot discuss most any major issue in Singapore today without weighing the importance of Temasek, GIC, and Singaporean public finances.

It was with great interest that I recently saw an article entitled “Why Our Saving Rates are Among Highest in the World but We Have No Money for Retirement?”.  The well intentioned author lays the blame primarily at the feet Singapore’s “transformation into an open economy” and “heavy reliance on large multinationals and imported workforce…” but overlooks the most important factor, the role of Singaporean financial policy and specifically GIC and Temasek.  Let me explain.

Let’s take a very simple example to illustrate the point.  Let’s assume that a Singaporean worker started earning an average Singaporean wage in 1980 and earned an average wage every year through 2011 according to IMF and Singapore Ministry of Finance data.  Every year the employee and the employer paid the mandated CPF contributions.  To further simplify, and be generous to the Singaporean government, let’s assume that the savings are earning the highest rate of return of the CPF contributions.  For instance, I assume that current CPF savings are earning 4% rather than 2.5%.  This saves the difficulty of estimating the weighted return percentage and is very generous to the Singaporean government. (I want to emphasize that I am fully aware that 4% is not the primary rate but rather 2.5%.  I want to be extremely generous to the government as the numbers are still quite different).

Making an average Singaporean wage, an average worker would have earned a total of $898,227 SGD in wages over that period and contributed $318,871 SGD between employee and employer contributions to a CPF account.  Interest growth would total $218,241 bringing the accumulated savings of the average employee to $537,112 SGD, assuming that the money has not been withdrawn for something such as the purchase of a flat.  This is not an insignificant amount of money by any means but it fails to tell you the whole story.

GIC, Temasek, and government linked companies have depended heavily on the low priced capital they could obtain.  This was mandated by the government who required savers to save their money with the government and “guaranteed” savers a low rate of return.  According to current data, the inflated assumption of a 4% guaranteed return does not even keep pace with inflation.  Consequently, the Singaporean saver who is forced to save with the government is implicitly losing money and subsidizing government investments and government linked companies.

How much then has the low interest rates mandated by the government in the CPF cost the “average” Singaporean?  Let’s assume instead of receiving the “guaranteed” CPF rate of return that savers instead earned the GIC long term average of 7%. (I am aware that GIC reports in USD but this is only for illustrative purposes and 7-8% is the long term return on equities in virtually all stock markets).  The “average” Singaporean would now have saved $798,806 SGD.  In other words, if CPF savers only earned the GIC rate of 7% rather than the CPF rate, the “average” Singaporean would be $261,694 wealthier.  Furthermore, if we took the unrealistic assumption that the “average” Singaporean earned a Temasek rate of return, they would be sitting on $4.5 million SGD a difference of $3,984,258 SGD from the current balance.

Most disturbingly are the implicitly high costs associated with the GIC and Temasek financial industrial complex.  Let’s again take a simple example.  Let’s assume that the difference between what a saver earns with CPF and 7% is the GIC “fee”.  In other words, if GIC earns 7% and CPF pays out 4%, again a simple example, then the GIC “fee” is equal to 3%.  The GIC “fee” is $261,694 SGD but this again only partially tells the story.  In the CPF system, the saver, along with employer contributions, has contributed $318,871 SGD and received $218,241 SGD in “guaranteed” interest.  However, this is $43,452 SGD less than the GIC “fee”.  In other words, the CPF saver has paid more to GIC than they have received in “guaranteed” interest.

There is one more way to think about the GIC fee relative to other asset managers.  Hedge fund managers are generally the most expensive asset managers in the financial services world.  Though not all hedge fund managers charge the same fee, it is pretty standard for hedge fund managers to charge what is called “2 and 20”.  That means there is a 2% of assets under management yearly fee and 20% of all profits earned.  To use a simple example, let’s assume you give a hedge fund manager $100 million SGD and he doubles your money to $200 million in one year.  If the 2% assets under management fee was taken at the beginning, the hedge fund manager would earn roughly $22 million ($2 million + $20 million.  Again, this is using very simple numbers and calculations).

Now let’s apply that same compensation structure a CPF saver.  An average hedge fund manager who earned the GIC rate of returned for our “average” Singaporean would have charged $233,111 SGD or $28,582 SGD less than GIC.  In other words, Singaporeans are paying more for GIC than the average hedge fund manager.  Finally, many hedge funds have something called a “hurdle rate”.  A “hurdle rate” is the rate of return the manager must exceed before earning the 20% of profits incentive.  For instance, a common hurdle rate is 5% so that any rate of return less than 5% is not subject to the 20% of profits fee.  Singaporean CPF savers are paying more than the average hedge fund manager to earn a “guaranteed” 2.5-4%.

While the concern over the lack of savings as many Singaporean approach old age is understandable, it is important to understand how this fits together with the already noted concerns about investment returns from Temasek and GIC.  On top of the extremely low rates of return Singaporeans are by law required to earn, they are paying exorbitant implicit fees even if we assume that the rates of return declared by GIC and Temasek are accurate.

Singaporeans have every right to be interested in GIC and Temasek financial management as it is your money.

Note: You can find a spreadsheet detailing the calculations here.  This should not be taken as financial or investment advice in anyway.  Finally, this of course does not account for all the details of life and is a simple calculation based upon public data about Singaporean wages, savings, and rates of returns and is not intended to account for every possible detail or variable one may encounter in the course of their life such as using CPF money to purchase a flat.

Temasek and the Case of the Undervalued Assets

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I am amused and intrigued by people who have no understanding of the implications of their own arguments or do not carefully read what I have written.  In his “rebuttal of a rebuttal”, Mrs. Snook further attempts to convince myself and others about the correctness of her position that Temasek undervalued assets when it received them from the Singapore government therefore allowing Temasek to earn 17%.  Let us take a minute and explore his position and its importance.

Let me begin by clearly stating: the analysis of Temasek receiving undervalued assets to boost their claimed returns is entirely true.  Read my previous rebuttal (and related posts about Temasek accounting here and here) on the matter and you will clearly see that I never disagree with her or rebut her facts.  (Expecting her to respond as she did, I was kind of saving this part in reserve.  My apologies if that means I played a little dirty).  The only thing that I do is warn her about the implications of what her argument means.  Now let’s explore the facts and additional implications of what Temasek receiving undervalued assets means.

A basic argument is made about the original legacy holdings of Temasek with a simple illustration.  If the owner of a $1 million in financial assets transfers them to a holding company that they own at a nominal value of $100, nothing has changed.  The original owner of the assets, owns them, which owns the assets so there has been no change in the wealth of the owner.  The same argument is made about Temasek companies transferred from the government.  As is written “it was just an administrative exercise with no implications for the tax payer or citizen….I now own a company which owns $1 million in shares.  I have lost nothing.  I am still a freaking millionaire.”  As elegantly freaking stated as that is, let’s examine this claim closer.

First, this poorly constructed analogy overlooks the implications of how returns are claimed.  Let’s assume the owner of $1 million in unlisted financial assets, as the Singapore government was in 1974,  transfers its ownership to a company she owns for a nominal value of $100.  There is no change in wealth.  However, one year later, the owner cannot go out and claim that his company has an annual return of 999,900%!  This would be considered absurd by everyone who knew how that return was calculated.  Yet this is exactly what is claimed.  When Temasek receives assets at a “zero or nominal value” which are worth significantly more and then claims high returns, this is not a true or accurate picture of its actual performance.

Second, the reason I agree so strongly with the theory that Temasek is receiving undervalued assets is that purchasing or receiving undervalued assets is one of the best ways to cover up investment losses.  Let’s take a hypothetical situation.  The owner of the $1 million in unlisted assets transfers it to her new investment company at a nominal value of $100 and convinces her grandmother to give her some money to invest in the stock market.  Let’s assume, hypothetically of course, this new investment mogul guarantees Grandma a return of say 2.5% on her investment of $10,000.  This talented CEO takes this $10,100 into the stock market and let’s assume she buys some bank stock.  Then assume that the bank stock bought by this investment genius declines in value to say $5,000 a loss of 50.5% at which point it is sold.  Rather than going and telling Grandma she lost a lot of money, this talented investment guru revalues the unlisted assets from $100 to $6,010.  The official capital is only $5,000 but after revaluing the unlisted assets, the firm value is $11,010 allowing the new firm to declare a 10% return.  Grandma is impressed and keeps investing with her talented offspring.  This firm with the enormously undervalued assets as a cushion, can endure a lot of investment losses before encountering problems.

The question then becomes has this undervaluation of assets acquired or received by Temasek actually taken place and has the tax payer been hurt by this practice?

Due to the lack of data and their refusal to release the data, we cannot analyze in great detail the value of the assets transferred from the Singapore government at Temasek’s inception.  However, given the number of companies that were transferred, the aggregate value they were transferred at, and their size, it is quite probable they were significantly under valued when transferred to Temasek.  This would be a good start to many years of over stating returns and covering up losses.

Worryingly, this pattern of the Singapore government providing or selling Temasek significantly undervalued assets continues to this day.  There are two recent and obvious examples of how this behavior which is used to pad Temasek returns and harm the tax payer.  First, the Singapore government is paying $1.1 billion SGD to purchase buses for the SMRT.  The problem with this arrangement is that SMRT is a publicly listed, private company owned by Temasek that declared a $120 million SGD annual profit for the year ending March 31, 2012.  The government of Singapore is obviously subsidizing the profits of a Temasek company by transferring public assets to a private company incurring a tax payer loss.  To put this arrangement in perspective, if SMRT had to pay a 10 year bond with annual payment at a 4% interest rate on the $1.1 billion SGD in buses: it would pay $136 million SGD in principal and interest costs making its yearly profit disappear.  Given this information, it seems highly unlikely SMRT would have a $2 billion SGD market capitalization if the Singapore government was not subsidizing Temasek profits by billing the taxpayer for the capital used by a private company.

Second, as was pointed out by Steve Wu, Temasek with the help of a $3.2 billion SGD capital injection from the Singapore Ministry of Finance paid $3.2 SGD billion to acquire Changi airport.  This transaction is notable for a few reasons.  For instance, according to one document from Changi Airport, the government since the late 1970’s has invested approximately $5.68 billion SGD.  This implies that in pure dollar terms, the Singapore taxpayer lost approximately $2.5 billion SGD.  If we however assume, a purely hypothetical return on these airport investments by the government of 5% or 17%, the Singapore tax payer would have had an asset worth $13.3 billion or $202 billion respectively.  If the airport “investment” by the government earned a low yielding 5%, the Singapore taxpayer would have lost $10.1 billion SGD and if it earned the Temasek rate of return an astounding $198.8 billion loss.

Furthermore, by numerous valuation methods, it appears that the Changi Airport was significantly undervalued.  For instance, in its first full year of operation, the Changi Airport group earned $337 million SGD.  That is a 10.5% rate of return an incredible return for an airport.  Its profits ending 2012 was $553 million a 17% cash flow rate of return while the tax payer incurred a $2.5 billion SGD loss.  Temasek obviously received a sweetheart deal in acquiring Changi Airport at the expense of the tax payer.

To briefly recap the implications of receiving assets at “zero or nominal cost”.  First, Singapore tax payers are suffering losses by subsidizing Temasek profits.  Second, Singapore and Temasek are engaging in Mickey Mouse accounting.  Third, Temasek returns are inflated by the “zero or nominal cost” assets it received.  Fourth, Temasek accounting does not consider the cost of capital.

I completely agree that Temasek and its subsidiaries are receiving capital and companies at “zero or nominal cost”.  Unfortunately, this has disastrous and chilling implications for Singapore and Temasek.

 

Note: I have been compiling a database of sweet heart deals involving Temasek or Temasek linked companies.  Please email me at christopher@baldingsworld.com or on Facebook if you have deals you think should be reviewed.

Rebutting Nonsense: The Implications of “Zero or Nominal Cost”

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I was recently notified of a rebuttal to some of my writings and specifically attempting to clarify how Temasek Holdings has earned 17% annually since 1974 as they claim.  The author claims that Temasek investment returns are entirely reasonable because Temasek received these companies at “zero or nominal cost”.  Consequently, earning 17% annually is relatively easy given the low initial valuation.  I will begin by discussing the implications of what the author claims and then in a later piece move to analyzing if what the author claims actually happened.

The Implications:

  1. Despite the author writing that I was “hinting that the returns are unbelievable and must be the result of Mickey Mouse accounting by TH”, the author states that the returns are unbelievable and are the result of Mickey Mouse accounting.  Let me explain.  The author correctly notes that the government of Singapore “started certain enterprises” in the 60’s and 70’s but then transferred those holdings to Temasek at “zero or nominal cost”.  Ask yourself this: when the government of Singapore started these capital intensive enterprises in shipping and airlines which required large investments, did it start them at “zero or nominal cost”?  Definitely not.  The government invested large amounts of money to start those companies but then transferred those assets to Temasek well below value, if what the author claims happened.  The first implication: the government is absorbing significant losses to start companies with large initial investments and subsidizing the profits of Temasek by transferring these corporate assets at “zero or nominal cost” incurring a loss for the government.
  2. The second implication of the authors claims: Temasek is engaging is Mickey Mouse accounting.  The author claims that the government of Singapore can transfer companies to Temasek at “zero or nominal cost” because these were not publicly traded companies at the time.  That is incorrect.  Just because these companies were not publicly listed does not mean that Singapore and Temasek can value the transfer of assets at “zero or nominal cost” or whatever value it wants.  As the primary or sole shareholder, those assets even in the absence of a public market, the government should have transferred those assets to Temasek based upon some measure of historical cost.  Let’s take a simple example.  If the government of Singapore creates the Acme Manufacturing company and invests $1 billion SGD and is the only or the majority shareholder, it should transfer the Acme company to Temasek based upon some value of the historical cost after accounting for profit and loss of the company say $1.1 billion SGD if the company made a profit.  The Singapore government cannot invest $1 billion SGD and then transfer that $1 billion SGD asset to Temasek at “zero or nominal cost” because it wants to artificially boost their returns.  That is truly Mickey Mouse accounting.
  3. The third implication of the authors claims:  Temasek returns claims are only “accounting” returns and not actual returns.  Just as Temasek declared a significant profit from its sale of Virgin Atlantic despite purchasing the stake for $1.65 billion SGD and selling it for $360 million, the author is saying the same thing about all Temasek returns.  By transferring the assets at “zero or nominal cost” as the author claims, this significantly increases Temasek’s accounting returns  but lowers the actual returns.  Let’s take a simple example.  Let’s assume that the government of Singapore spends $100 million SGD to create Acme Manufacturing, transfers it to Temasek at “zero or nominal cost” of say $50 million SGD, and Temasek then takes it public after which the market capitalization is let’s say $100 million.  Temasek enjoys a $50 million SGD profit and declares a return of 100%.  If Temasek receives the asset for $1 million SGD its profit is $99 million SGD and it declares a return of 9,900%!  The Singapore taxpayer however, suffers an offsetting loss of $50 million SGD (or $99 million) to subsidize Temasek “returns”.  In other words, the author is saying Temasek returns are inaccurate and should be considered accounting returns similar to declaring a profit after selling an asset for $360 million purchased for $1.65 billion.
  4. The fourth implication of what the author says: is that Temasek accounting does consider the cost of the capital.  This might be the most damaging and concerning implication.  Just as employers pay employees in the form of wages, companies have to pay and account for the cost of capital.  Capital may be a financial asset like stock in a company or a machine used to make things.  However, companies must account for their cost of capital.  A bank with deposits has to pay its depositors a small amount of interest.  A real estate development firm typically borrows money to builds a new apartment building or mall and it pays interest to a bank.  If Temasek is receiving assets for nothing then of course their returns should be enormous.  Let’s return to Acme Manufacturing for a moment.  What if they received their building and machines for free and didn’t have to pay for the cost of the building and machines?  Of course they would make a lot of money.  They should make a lot of money.  The author of this piece is stating that Temasek and other companies are not paying for their capital.  That is an enormous problem.

To briefly recap what this author has stated.  First, Singapore tax payers are suffering losses by subsidizing Temasek profits.  Second, Singapore and Temasek are engaging in Mickey Mouse accounting.  Third, Temasek returns are inflated by the “zero or nominal cost” assets it received.  Fourth, Temasek accounting does not consider the cost of capital.  Mind you this is what this anonymous author has said by arguing assets are transferred at “zero or nominal cost”.  Their argument not mine.

As I have repeatedly said, Temasek and Singapore have created an enormous problem for themselves.  If they try to tell the truth in one area, the enormity of the deception increases in other areas.  Today, I have focused only on the implications and arguments made by this anonymous author.  Next week I will examine what the data shows about whether what this author says is true.

Update: Thanks to a loyal reader for catching a small typo.

Why Ho Ching Won’t Respond to Me

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I am frequently asked why Temasek or the Singaporean government refuses to respond to what I have written about the obvious discrepancies in their financial accounts.  The answer is simple: they cannot respond.  Let me explain some of the reasons.

First, Temasek and the government of Singapore know there are enormous discrepancies in the public financial accounts and the claimed returns of Temasek.  Let’s assume for one minute that I am wrong in everything I have said about Temasek and Singapore (I am not but let us assume for a minute that I am).  Singapore and Temasek could easily refute my claims with simple data they should have in front of them.  I am aware they claim factors like national security in refusing to release financial data but even with this in mind, they could prove me wrong easily without releasing total reserve information or other sensitive data.  The fundamental problem facing Temasek and Singapore is that I am right in my fundamental analysis and they cannot prove me wrong.

Second, Temasek and the government of Singapore cannot respond because if they provide any evidence or data it will only expose other flaws in their carefully constructed edifice.  As a small boy I remember my mother telling me that if you lie, you then have to lie even more to cover up your original lie, and that the truth eventually catches up with you anyway.  If Temasek and Singapore do respond in sufficient detail to try and refute what I have written, they will only create additional problems by revealing other discrepancies.  For instance, even if Temasek returns are actually 17% (which they are not), this only creates a larger discrepancy given the many years of operational government surpluses which should yield a much larger total number of financial assets.  In other words, providing any information will only further reveal the enormous inconsistencies of Temasek and Singaporean financial data.

Third, the government of Singapore cannot intimidate, control, or sue me.  I am not Singaporean.  I do not live in Singapore.  I have no family in Singapore.  The government of Singapore historically has jailed, sued, or bankrupted people who challenge authority or present inconvenient facts about their rulers or policies.  The government of Singapore cannot control me and they definitely cannot intimidate me.  Let me make something perfectly clear: I am not going away.

Fourth, Temasek and Singapore know that responding to my allegations will only invite additional scrutiny from much more powerful and well known institutions and persons.  By not responding, they are hoping this eventually goes away.  They only invite additional questions by responding to what I have shown with Singaporean data.

I would welcome the opportunity to come to Singapore and either be provided access to financial data to prove myself wrong or engage in a public debate with a public sector official, though I know this will never happen. I only began writing what I wrote after reviewing it in great detail and taking my findings to a great many people asking them for other explanations or what I might be missing.  Making such strong accusations about a financial institution and a state’s public finances required a very high burden of proof.  However, given the enormous discrepancies in data published by Temasek and the Singaporean government, no other conclusion could be reached.

I will even state that if I am ever proven wrong with hard data, which is incredibly unlikely, I will write a public apology to all institutions and persons that I have referenced in my writings.  Wonder if Temasek and Singapore, Inc. are willing to make a similar guarantee and then provide the data to prove me wrong?

Shane Todd, Yemeni Rebels, and Singapore

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People have emailed me asking my thoughts on the death of American Shane Todd at the Singaporean Institute of Microelectronics a government linked research lab.  While I have no inside information of any kind and do not know what happened with Mr. Todd, I am willing to entertain the possibility the he met with nefarious forces that resulted in his death.  My reason is simple: I am aware of the past record of Singapore activities in working with known nuclear weapons proliferators and drug lords.

To take one example, Temasek Holdings and Singapore Airlines partnered with China Great Wall Industry (CGWI) to establish an air cargo transport business based out of Shanghai.  The Temasek, Singapore Air, and CGWI partnership was interesting for a number of reasons.  First, CGWI was a known nuclear weapons proliferator which had been cited repeatedly for many years as selling high grade weaponry to countries like Iran.  Temasek and Singapore Air clearly knew who they were partnering with and chose to ignore the risk of conducting a joint venture with a nuclear weapons proliferator.

Second, CGWI never had and today has no business in commercial air transportation or cargo.  In fact, today, CGWI primarily engages in satellite and space technology.  Given that Temasek and Singapore Airlines already had business ventures with Air China, which they maintain to this day, this raises the suspicion that this joint venture was entered into for other purposes besides standard economic reasons.  Otherwise, airlines with air cargo transport businesses would seem to be more likely partners.  The known risks and lack of expertise in this area, make the creation of an air cargo transport business with CGWI a dubious proposition.

Third, CGWI is a subsidiary to a larger Chinese military industrial company that has other subsidiaries that sell high grade weaponry to Iran and other nuclear related material.  CGWI has since formally instituted export controls to bring itself into compliance with international standards on export controls to countries like Iran and Syria.  However, much of this activity has now shifted to a sister company of CGWI known as China National Precision Machinery Import and Export Corporation (CNPMIEC) which listed no specific export limitations.  Up until recently, CNPMIEC had pictures of weapons you could purchase on their website including should fired missiles with no statement about export restrictions.   In fact, their CNPMIEC weaponry recently turned up in a captured shipment from Iran to Shia militants in Yemen.  An interesting side note is that the date of manufacture of the seized weapons was during the Temasek, Singapore Airline joint venture with CGWI.

None of this even addresses the behavior of Huawei but only known Temasek and Singapore Airline behavior in partnering with nuclear weapons proliferators.  That is a separate story unto itself and what is known about Huawei and their activities.

I do not know what happened to Shane Todd and whether it is a simple suicide or whether there is something more nefarious.  However, given what I know about the activities of the Singapore government in partnering with the Chinese military and known nuclear weapons proliferators, I am very willing to consider the possibility that Singapore government linked entities are helping the Chinese military.

 

Why I Won’t Be Coming To Singapore Soon

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Early Saturday morning, I was sent numerous emails from people about a Financial Times story about American material scientist Shane Todd who was working at the National University of Singapore. Todd died under mysterious circumstances in shortly before he was to leave his position at NUS for a position in the United States. While the Singaporean police maintain it was a suicide, with a formal inquest scheduled for March, there are significant inconsistencies and extremely troubling aspects of this story.

First, Todd told friends and family that he was being forced by his NUS research laboratory to provide dual use military technology to Chinese company telecommunications giant Huawei. Huawei has been linked to a variety of questionable behavior including among other things selling internet spyware networking technology to Iran in violation of UN sanctions. According to the Financial Times report, the NUS research lab has refused to cooperate in the investigation.

Second, Todd told family that if anything happened to him they should call the American embassy in Singapore and that it would be linked to his work at the NUS research labs work with Huawei. When people tell other people what to do if they turn up dead and then turn up dead, those warnings should be taken seriously. Furthermore, his friends all indicate that Todd was in a good mood and happy to be returning back to the United States. There is no indication that he was depressed or suicidal.

Third, there are enormous discrepancies in the police reports. From official descriptions of the scene which do not match his apartment and refusal to consider evidence that someone was using his computer after his death despite electronic evidence to the contrary.

While I will render absolutely no verdict on the cause of death of Mr. Todd as it is important to gather a lot more evidence and information, there are many unanswered questions that warrant further investigation.

I can only speak to my personal knowledge that given the frequency with which Temasek and other government linked corporations have established joint ventures with known weapons proliferators selling high grade precision machinery to Iran or partnered with the largest Burmese drug lords, it comes as no shock that a respected NUS research lab would be accused of working to obtain dual use military technology for Huawei. Now again, I will render no verdict about whether NUS has sanctioned behavior Mr. Todd accuses it of doing as there is a lot more evidence that is needed before reaching a decision. However, there should be an absolutely full investigation of the accusations leveled against NUS in potentially acting in concert with Huawei to obtain military technology for the PLA.

Finally, I have been warned by many people to never come to Singapore. Whether it is to avoid a friendly “coffee” or more serious problems, like Mr. Todd’s. Given the seriousness of the charges I have made against people, I think it only prudent to wherever I go look over my shoulder and take other prudent measures. People will take extreme actions for a lot less than the $300 billion that I claim is missing from Singaporean accounts. Given events like this, I can understand others (my pregnant wife included) concern for my safety.

I would call on the Singapore government to not only thoroughly investigate the matter of Mr. Todd but to do so in a completely transparent manner providing all evidence to the public. Only by thoroughly answering all questions and providing the proof to interested parties will these questions be answered. Hiding evidence, obfuscating the truth, and refusing to fully investigate this matter will only raise more questions.

How I Became Interested in Singapore

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I am frequently asked how I became interested in Singapore and the unique case of Temasek Holdings and the Government of Singapore Investment Corporation (GIC).  Despite conspiracy theories in which I work for a hedge fund, the communist government of China, or those crazy American capitalists, the truth is much more boring.

In 2007 and 2008, I worked at a think tank in Santa Monica, California and I became interested in sovereign wealth funds.  Headlines on sovereign wealth funds were exploding in the news with all nature of fear mongering about the potential for combining state political power with financial might.  Interested in understanding the behavior of sovereign wealth funds, like Temasek and GIC, rather than believing the news driven fear mongering headlines, I set out to assemble data that might would help us assess their investment patterns.  I subsequently spent many months pouring through data sources such as corporate filings, Securities and Exchange Commission records, my local Bloomberg terminal, and Thompson Datastream to assemble data that would provide me insight into their behavior.

Published on an academic paper database in June 2008 with the sexy title “A Portfolio Analysis of Sovereign Wealth Funds”, it was covered in a variety of outlets such as the Wall Street Journal among others.  Written with much rhetorical flourish, it contained such incendiary claims about Singapore as:

“Examining the public equity holdings of Temasek Holdings and the Government of Singapore Investment Corporation (GIC), both Singaporean sovereign wealth funds, for whom good records exist, their holdings indicate a conservative portfolio of global equities.”

“…Singaporean SWF’s do not appear to assume risks other sophisticated investors do not also assume.”

“…the Singaporean SWF private equity investment record seems both rational and respectable.”

While I understand that these claims were inflammatory to absolutely no one, given the data in 2008 they were entirely defensible and based on all available evidence at the time.  However, as John Maynard Keynes notes, “when the facts change, I change my mind.”

In the spring of 2010, I began writing my book entitled Sovereign Wealth Funds: The New Intersection of Money and Power.  It was during this process having studied other sovereign wealth funds that I attempted to reconcile Temasek’s claim of having earned 17% annually since its inception in 1974.  Knowing the long term returns of stock markets and other major sovereign wealth funds averaged from 6-9% depending on the riskiness of their portfolio or their respective market, I was curious to find out more about what investment strategy SWF’s used to pull off such spectacular returns.  I then began by trying to find their investment strategy and holdings.

I quickly realized that I could not come close to reconciling the 17% annual returns claimed by Temasek with either the broader market or individual holdings.  Of all the sovereign wealth funds I reviewed, Singapore and its respective funds were the only funds with serious financial discrepancies.  For instance, those funds claim to earn a rate of return consistent with investments they are known to have held but also inflows and outflows could be reconciled such that there did not appear to be large differences.

Singapore and its funds, Temasek and GIC, were the only instance I could find where serious discrepancies existed between a) the rate of return claimed by a sovereign wealth fund and the broader market b) the rate of return claimed by a sovereign wealth fund and individual investment holdings and c) the claimed assets under management, capital inflows, and claimed annualized returns.

After discovering such a large discrepancy in Singapore, I looked hard at other funds and countries and simply could not find a discrepancy of a remotely similar magnitude.  And believe me I looked hard at other countries and funds.  The differences are well beyond anything that might be considered a rounding error or understandable difference.

I never at any point set out to write extensively about Singapore it is only that its public finances simply cannot be explained or reconciled.  Given the inflows from public surpluses and borrowing for the purposes of investment as claimed by the government coupled with the claimed high rates of return, there simply should be a lot more money than is listed on the government balance sheets.  The government may be able to evade questions and concerns about their finances from someone like myself but they simply cannot avoid the laws of mathematics.

It was simple academic curiosity of continuing to ask questions that drew me to study Singapore, Temasek, and GIC.  I am not connected to Singapore in anyway and have refused to be drawn into Singaporean politics or endorse politicians.  I will however continue to ask questions and try to find the truth of what has happened to the money lent by CPF account holders and the years of surpluses paid out in taxes by ordinary citizens.