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As individuals, our investment plans typically align with our life goals, such as buying a house, our children’s education, or retirement planning. More often than not, our plans will change, especially as we enter different life stages, and we may need to drawdown some of our investments for more immediate uses.
However, an institutional investor like Temasek is able to take a longer term view of the coming decades. This is because of its mandate to achieve sustainable returns over the long term.
These returns ultimately benefit Singaporeans as the Singapore Government may spend up to 50% of Temasek’s expected long-term returns, net of inflation, as part of the Net Investment Returns (NIR) framework.
Backing Leading Companies to Build A Resilient Portfolio
In general, the longer your investment horizon, the higher the ability to ride out short-term fluctuations – that are a natural part of market cycles – to enjoy long-term growth.
While no one knows when a future downturn will happen, the only conclusion we can draw is that it will happen at some point – and we need to be prepared when it happens.
This also means constructing a resilient and forward-looking portfolio, that can withstand risks arising from exogeneous shocks through market cycles. Fresh in our minds is the COVID-19 pandemic, when global stock markets crashed over 50% from February to March 2020.
But, as we can see in the chart below, while there have been at least six market downturns in the past 30 years, Temasek’s underlying assets (depicted by the yellow dotted line) have remained resilient.
To deliver sustainable value over the long term, Temasek takes a 70-30 approach to its portfolio construction. That means to have a 60-70% resilient component that is held for the long term, with stable and sustainable returns. These investments also help provide liquidity for Temasek through the dividends and distributions paid out.
The other 30-40% dynamic component comprises higher-growth investments held for a shorter duration, with capital continually recycled for reinvestment in higher growth opportunities for higher returns.
While there will inevitably be both winners and losers, Temasek has the opportunity to grow with the winners and double down on them. One example that underscores Temasek’s long-term investment approach is tracking high-growth companies over time.
Case in point: Temasek recognised that digital payments were on the cusp of proliferating globally in 2014 and closely monitored this sub-sector within the financial services space. It identified a digital payments company called Adyen as a promising business and made an initial investment of S$50 million (€35 million) in a Series B round at a valuation of US$1.5 billion in 2014.
As the business gained traction and scaled, Temasek upsized its initial exposure to the end-to-end payment platform.
In 2018, Adyen listed on the Euronext market – providing a liquidity event for its early investors. Today, it has a market capitalisation of close to €42 billion.
Beyond returns, participating in the growth story of innovative businesses also gives Temasek valuable insights and a deeper understanding of how emerging technologies may be part of longer-term trends.
Take the Financial Services sector, for example. Ten years ago, banks comprised the bulk of Temasek’s exposure. However, Temasek saw that secular trends like digitisation will benefit this sector. So it upped its exposure to non-banking areas like digital payments (e.g. Adyen), asset management, market infrastructure and financial software. On the back of another long-term trend Longer Lifespans, Temasek added its exposure to insurance.
A decade later, the mix between banks and non-banks in Temasek’s Financial Services exposure is about 50-50. Many of these opportunities are also in US and Europe.
The diversification from a market and geographical perspective, and the reshaping of its portfolio across sectors has given Temasek’s portfolio better resilience and returns.
Read Also: Temasek Review 2024: 4 Investment Lessons We Can Learn From Temasek As An Investor
Investing Across Diverse Geographical Markets And Sectors
All investments come with some risk, and even the savviest investors cannot eliminate all risk. External forces, such as market movements, geopolitics and even technological breakthroughs or natural calamities can impact companies’ performance.
In Temasek’s latest annual disclosure exercise, Temasek Review 2024, geopolitical tensions were highlighted as a key concern. In particular, tense US-China relations, and the wars in Ukraine and Gaza spell risks on the horizon. Rising protectionism may also dampen global growth.
As a global investment house with 13 offices in 9 countries around the world, Temasek heeds to the age-old adage of not putting all your eggs in one basket. Apart from seeking opportunities in both the listed and unlisted space, Temasek’s portfolio is spread across geographies and business sectors, guided by longer-term structural trends: Digitisation, Sustainable Living, Future of Consumption and Longer Lifespans.
Underlying country exposure (%)
Source: Temasek (As at 31 March 2024)
Sector (%)
Source: Temasek (As at 31 March 2024)
Taking Calculated Risks Over The Long-Term
Temasek’s investment approach is both top-down and bottom-up. On a top-down basis, Temasek is guided by the four structural trends.
Temasek’s individual investment and divestment decisions are ultimately made using a bottom-up approach, based on Temasek’s intrinsic value analysis and risk-return framework.
This intrinsic value analysis of a business will evaluate returns against a risk-adjusted cost of capital. By pricing risk, investors can assess if the potential returns are justified by the risks taken.
Investments in riskier sectors or markets will have a higher cost of capital. For unlisted investments, an illiquidity premium is added, while venture risk premium will be layered on for early-stage investments.
Temasek also applies an internal carbon price to assess the potential climate impact on its returns expectations.
While a portfolio comprising mainly equities typically translates to higher volatility year-to-year, Temasek can ride out such short-term volatility over the long term. This can be seen in the more stable 10 and 20-year returns lines in purple and orange in the chart below.
Source: Temasek (As at 31 March 2024)
An Investment Portfolio For Future Generations
With Temasek’s 70-30 approach, it’s designing a portfolio that can capture growth sustainably while withstanding short-term volatility.
This has moulded Temasek’s portfolio to be resilient in an increasingly complex world as its team navigates uncertainties while uncovering opportunities.
Similarly, individuals need to consider a personalised portfolio that is reflective of both their risk appetite and investment horizon. This way, we too can be confident of riding out market cycles, while building towards our own financial goals – be it in the shorter-term to buy a home or go on regular holidays. Or think longer-term, for our children’s education or our retirement, or even to outlive ourselves, as legacy for our children or charitable causes we believe in.
Read Also: Why Is Temasek Focused On Building A Resilient Portfolio For The Long Term?
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