What if Temasek Actually Earned 17%?

While I have written extensively about the return discrepancies at Temasek let us consider the possibility that I am wrong.  In fact, let us go so far as to assume that everything Temasek has claimed about its returns is completely and entirely accurate in every way.  In this column from this point forward, we shall assume that Temasek has earned an average rate of return since 1974 of 17%.

According to Temasek at the end of the fiscal year in March 2012 (Temasek has not yet released their March 31, 2013 annual report), they reported $198 billion SGD under management.  If we assume that Temasek has exactly $198 billion SGD and not one penny more or less and that they earned exactly 17% and 17.01% or 16.99% this implies they began with $508 million SGD (increasing the range to 17.44% and 16.5% does not fundamentally alter this analysis).

This actually reconciles rather closely with other available information rather closely in two ways.  First, Temasek has said in the past that it began operation in 1974 with $374 million (the webpage stating this has been taken down recently).  Second, Singapore public operational surpluses in the years prior to 1974 come very close to equaling this amount of money. The accumulated operational surplus from 1969 to 1973 was $551 million SGD.  In other words, there are multiple data points that come close to reconciling against what could possibly be true with regards to Temasek earning an average of 17% since inception.

So let us assume for the rest of this analysis that Temasek was endowed with between $374-500 million SGD and that they averaged 17% annually since inception giving them their current $198 billion SGD under management.  Doing this however only creates a new and enormous problem.

From 1974 to 2012, Singapore enjoyed total operational public surpluses from $307 billion SGD and incurred new borrowing of $381 billion SGD.  This means that between 1974 and 2012, Singapore had a total of $688 billion SGD in free cash flow for investment purposes.

Here is where we encounter the problem if we assume that Temasek earned 17% since 1974.  In its public balance sheet ending March 31, 2012, the Singapore government lists total assets of $765 billion SGD.  If we subtract out the $198 billion SGD managed by Temasek we are left with $567 billion SGD.  If Temasek earned 17% annually from 1974 to 2012 that means that the government was receiving $688 billion SGD to somehow end up with $567 billion.  In other words, the non-Temasek public Singapore investors managed to lose $121 billion SGD or about .5% annually.

Let us take this analysis one step further and assume that the public surpluses and borrowing earned a modest 5% after expenses and costs (the 5% number is for illustrative purposes only but less than 7% claimed by GIC).  If the yearly surpluses and borrowing were invested every year and earned 5% annually, this would yield a total of $1.3 trillion SGD.  The difference between the actual Singaporean non-Temasek assets and what Singapore should have if surpluses and borrowing since 1974 earned a conservative 5% is a staggering $750 billion SGD.  In other words, Singapore is about $750 billion short of what it should have if Temasek earned 17% and the remain money earned 5%!

Though the evidence fails to support the claim that Temasek earned 17% annually since its inception in 1974, even if this is true it only creates bigger problems.  If Temasek did legitimately earn 17% annualized what happened to the rest of this so called investment juggernaut?


Note: Here is my file calculating the numbers from above.  If you wish to dispute the numbers please demonstrate the error of in my analysis.  I will not however be intimidated into silence.

The Transitive Property and the Problem of Singapore Finances

The transitive property in the study of logic defines how truths relates to each other.  The simplest example is if A = B and B = C then by definition A must equal C.  Taking a simple example, let’s assume that my friend tells me all cars are blue and that he has a car.  By extension I can know that my friends car is blue because my friend has a car and all cars are blue.  The transitive property provides us a way to reconcile truths against other things we know to be true.

Before proceeding to explain how this relates to Singaporean public finances, let me frame the transitive property in financial terms.  Let’s assume that my friend tells me on January 1st that he has $10,000 in an investment account.  I see my friend one year later and he tells me his investments made 10% last year.  I can safely assume that my friend has around $11,000 in his investment account.

There are two important points about the transitive property as it relates to finance.  First, if my friend tells me he starts off with $10,000 in an investment fund returns 10% in one year but then tells me he has $5,000 in his investment account, I know that my friend is leaving out important information.  Maybe my friend is only counting the gains on investments that did not lose money or maybe my friend went and bought a new car, but a 10% return on $10,000 with no other changes should leave $11,000 in the bank.  Second, while perfect information is always better, the transitive property allows us to work very logically with imperfect information.  For instance, if my friend tells me that he started the year with $10,000 in an investment fund and finished the year with $9,000, unless he spent money, I can safely assume his investments lost 10%.  I do not need perfect information to be able to figure out a lot about the finances of Singapore.

The Singapore government is trying its best to avoid the transitive property in defending its investment and public finance record.  Let me give you three examples of how we can use the transitive property to study Singaporean public finances.  First, Temasek claims that it has earned an annualized 17% since inception which gives us the ability to take the amount of money they currently have and calculate (estimate) backwards to how much they started with in 1974 or conversely calculate (estimate) how much they should have now based upon how much they claim to have started with.  We don’t need the government to provide us every piece of data and every number.

Second, we can estimate how Singapore is allocating investment funds between GIC and Temasek.  The reasoning is simple: if virtually any of the government surpluses and CPF funds after 1974 went to Temasek, it would have trillions of dollars given their claimed 17% return.  That would imply that either Singapore is sitting on trillions of undisclosed dollars or virtually all surpluses and CPF funds went to GIC.

Third, despite the popular belief that Singapore has not disclosed the size of their reserves, we can use the transitive property to calculate the size of GIC.  On the Singapore balance sheet published by the government they list their total assets.  We know how their total assets, Temasek assets, and government assets.  If the total amount of assets is the sum of the government , Temasek, and GIC, we can easily calculate the size of GIC.  Put another way if 50 = 10 + 20 + x, we can calculate the value of x.

Let’s put this into practice.  From 1974 through 2012, the sum of Singaporean debt and operational surpluses equaled $708 billion SGD.  According to their 2012 public balance sheet, the government of Singapore list $765 billion SGD in assets.  Please explain to me how Singapore saved and borrowed for investment purposes a total of $708 billion SGD between 1974 and 2012, claims to earn 17% and 7% over more than 30 years in Temasek and GIC, but only declares $765 billion SGD in assets.  Either investments are not earning what is claimed or money is being spent that is not being accurately reported.  There is no other explanation.

By definition Singapore cannot: a) invest $708 billion SGD b) claim a 17% and 7% return on investments over more than 30 years and c) only have $765 billion SGD.  One of these must be false. We can see clearly that only two of these three assertions can be true.

This is not a cultural problem, debt cost, currency loss, accounting issue, or government secrecy that is causing this discrepancy.  One of these claims has to be false.

If anyone wants to empirically point out where the error lies I will gladly listen.  However, I will not be intimidated by anyone.  Anyone.