In a yr the place most main markets have gone into bear territory, Temasek shocked on the upside with their web portfolio worth hitting a report excessive of $403 billion, damaged down right into a one-year funding efficiency of 5.81% (or an annualised 14% compounded since its inception in 1974).
I had the privilege of being invited to their 2022 Temasek Assessment, the place they shared extra insights that weren’t coated within the press launch. Listed below are some key messages that stood out for me:
A diversified portfolio based mostly on intrinsic worth picks
Temasek’s funding self-discipline is centred round intrinsic worth vs. a risk-return framework. In different phrases, the thesis for each funding must level to a transparent intrinsic worth and future development, which is then measured in opposition to the corresponding risk-adjusted price of capital. Increased threat sectors or markets naturally get assigned increased prices of capital.
There are over 400 corporations within the portfolio, so the above doesn’t seize the total image; as a substitute, it’s a consolidation I’ve accomplished of the corporations that characteristic as high investments on their public web site right here.
How did Temasek obtain constructive returns in a yr the place most market indices are detrimental?
Apart from a disciplined funding mandate, the clues could be present in how Temasek’s publicity and portfolio allocation is being managed:
You’ll discover that the portfolio is pretty diversified throughout completely different geographies and sectors. Therefore, whereas there are some positions within the pink e.g. Roblox, Temasek was largely spared from the latest meltdown in development / tech / US shares.
The elevated publicity to Singapore comes from a mixture of 2 elements: (i) valuation multiples in Singapore didn’t compress as a lot as China / US (ii) Temasek additionally invested $6.2 billion in SIA and took half within the rights points for Olam and Sembcorp Marine.
Temasek additionally continued to gather sizeable dividends i.e. $9 billion in complete.
What does Temasek take a look at earlier than deciding to speculate?
By now, I’m fairly positive most of you might be intrigued on their funding course of, like I’m. So I took the possibility to ask them extra about their thought course of behind each funding determination, and listed below are among the issues shared:
1. There’s a detailed thesis for each funding
The Temasek of us shared about their in depth due diligence previous to investing, in addition to actively monitoring and fascinating stakeholders even post-investment. Internally, that is all consolidated in an funding slide deck that the remainder may assessment.
Notably, every thesis additionally lays out frameworks and situations guiding their entry and exit from the funding. Whereas at finest an estimate, however there’s no less than an approximate holding interval set out for every to information their decision-making.
2. Intrinsic worth and threat elements are essential
A gorgeous development story just isn’t sufficient to make Temasek act on the funding; as a substitute, there must be a transparent intrinsic worth as nicely. That is then weighed in opposition to threat elements and price of capital earlier than Temasek decides if the funding will likely be worthwhile.
What’s extra, relying on the scale and nature of the funding, both quarterly or month-to-month opinions are carried out to measure in opposition to the unique thesis.
3. Administration high quality is essential
Administration high quality is among the high issues that Temasek appears at, because the capabilities of the leaders working the enterprise matter. Throughout COVID-19, this was more durable to evaluate because the Temasek group was unable to fly abroad and meet with the managers in individual, however this has since lifted as enterprise travels have resumed.
Divest as soon as the funding thesis has performed out
Temasek’s Director of Public Affairs, Paul Ewing-Chow, stated one thing that I felt was price repeating.
“We’re mid to long-term buyers, and never everlasting buyers.”
In contrast to some buyers who maintain on to their positions for an indefinite period of time, Temasek sees no qualms in divesting when the thesis has performed out, or when there are extra compelling alternatives for them to re-allocate capital to.
This would possibly assist to elucidate why Temasek offered Nio (and at an impeccable timing too, earlier than Nio’s inventory worth began crashing) proper earlier than the correction.
Threat administration in a globally unsure world
Whereas Temasek believes that development will proceed to sluggish whereas inflation stays elevated, they’ll proceed to speculate – albeit at a slower tempo because it expects extra market declines.
Whereas its previous one-year and historic returns look good, let’s not neglect that even Temasek just isn’t resistant to intervals of great drawdowns as nicely.
However extra importantly, Temasek’s funding posture is to journey out quick time period market volatility and give attention to producing sustainable returns over the long run. Whereas Temasek is open about the way it expects its portfolio to have increased year-to-year volatility of annual returns (with increased dangers of detrimental returns in anyone yr), the purpose continues to be centered on long-term returns.
In a interval of sustained market volatility and an unsure future (recession? persistent inflation? stagflation? rising rates of interest for longer?), particular person buyers will do nicely to recollect this.