Clarifying GIC’s Massive Forex Losses

TRE published an article by Philip Ang (‘S$Billions in CPF/GIC Forex losses must be disclosed‘) with regard to the billions of dollars of forex losses by GIC. However, the skewed data usage and analysis should be viewed in the proper context for the sake of clarity and credibility.

FX Losses Are Almost Inevitable

That GIC had FX losses should not surprise. MAS policy of maintaining an appreciation of S$ Nominal Effective Exchange Rate (NEER) meant that except during a secular rise in the main foreign currencies, overseas investments by any S$ investor are bound to incur FX losses caused by the rise in S$ external value. By contrast, foreign investors are bound to generate FX profits on top of the returns attained from investing in S$ assets.

FX is just one variable

But in any standard computation of total returns, FX cannot be viewed in isolation from all other variables that drive portfolio return. In simplified form, GIC’s annual return is derived from dividends and the marked-to-market change in the value of the assets, asset risk mitigation (e.g. derivatives and options), hedged and unhedged FX exposure.

Phillip Ang illustrated an example of a 15% appreciation of the S$ would mean a portfolio of 100b is worth 87b in a decade. But portfolio’s returns do not vary according to FX rates alone. The 15% appreciation looks huge but needs to be discounted over 10 years, or 1.3% pa. If GIC’s 10 year average return was 8.8% in US$ terms as stated in its annual reports, it means returns are 7.5% in S$ terms or that 100b portfolio will be 192b after 10 years.

Here is a real example. In 2011, the writer converted a portion of his S$ savings into GBP and US$ to buy bonds and equities. His view was these provided a superior return after accounting for the likelihood of FX losses. These assets subsequently returned +17% against FX loss of -3% resulting in overall return of 7%pa in S$ term over 2 years, higher than the return if he had remained in S$. Is the writer a bad investor for losing 3% in FX or not a bad one for making a total return of 14%? This is the decision-making every investor faced when investing outside the home currency.

FX Losses were largely acknowledged by GIC up to 2010

Indeed they were but hardly anyone knew it. Up to the 2009-2010 Annual Report, GIC reported its long run returns in S$ which would have included FX valuations in the total returns especially since occasional references were made to US$ returns which were higher.

In the 2008-2009 Annual Report GIC reported a loss of “more than 20%” for the year. GIC also provided its allocations by assets type and by country. By reconstructing the allocation mix and applying the relevant indices, the writer estimated that the portfolio lost 31% but S$ depreciated by 10% for the year, thus a total return of -21%.

In the 2009-2010 Annual Report, GIC reported that the returns “largely offset the loss in the previous year”. Again the writer reconstructed the portfolio using the then asset allocation mix reported and arrived at a portfolio gain of +34% but S$ appreciated 8% over the reporting period, thus generating a total return of +26%, a larger percentage recovery from 2008-2009 but from a lower base, thus did not completely recover the loss.

Obfuscation in the change of base currency

Up to the 2009-2010 report, FX valuations would have been captured in S$ returns reported. Thereafter, GIC reported its rolling 5, 10 and 20 year returns only in US$. The MOF explained that this was to allow easier comparison to the global market indices.

“This is an utterly lame excuse as GIC’s audience ought to be Singaporeans, not foreigners and that this further obfuscates the already poor transparency of GIC.”

This is an utterly lame excuse as GIC’s audience ought to be Singaporeans, not foreigners and that this further obfuscates the already poor transparency of GIC. However, it does not take rocket science to take the sum of the average US$ returns reported by GIC and the change in the US$-S$ exchange rate over the reporting period to arrive at the S$ returns. After a rise of 10% from 2010 to 2011, S$ was largely unchanged.

Conclusion

In reality, GIC’s FX exposure can be mitigated to some extent by owning the S$70b GLC portfolio. By keeping these assets in Temasek instead, the government not only kept the returns generated by the GLCs’ dominant and rent-seeking position in Singapore but subject GIC to far greater FX exposure than Temasek.

By legislating that CPF invests only in Special SGS, the government has no legal obligation to be transparent neither with the monies nor with GIC and Temasek. However, that citizens are compelled to hand over their monies in such a way implies there ought to be a moral obligation to inform the citizens. In the end, it is a political issue that can only be resolved by putting the fear of electoral defeat into this or any government. In the meantime, continue to be bemused by the fog of war over this great issue.

Chris K

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