In a 12 months the place most main markets have gone into bear territory, Temasek stunned on the upside with their web portfolio worth hitting a file 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 lined within the press launch. Listed here are some key messages that stood out for me:
A diversified portfolio primarily based 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 progress, which is then measured in opposition to the corresponding risk-adjusted value of capital. Greater danger sectors or markets naturally get assigned greater prices of capital.
There are over 400 corporations within the portfolio, so the above doesn’t seize the complete 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 12 months the place most market indices are adverse?
Apart from a disciplined funding mandate, the clues may 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 purple e.g. Roblox, Temasek was largely spared from the latest meltdown in progress / 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 have a look at earlier than deciding to speculate?
By now, I’m fairly positive most of you’re intrigued on their funding course of, like I’m. So I took the prospect to ask them extra about their thought course of behind each funding resolution, and listed below are among the concerns shared:
1. There’s a detailed thesis for each funding
The Temasek people shared about their intensive due diligence previous to investing, in addition to actively monitoring and interesting stakeholders even post-investment. Internally, that is all consolidated in an funding slide deck that the remaining 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 at the very least an approximate holding interval set out for every to information their decision-making.
2. Intrinsic worth and danger elements are necessary
A horny progress story isn’t sufficient to make Temasek act on the funding; as a substitute, there must be a transparent intrinsic worth as effectively. That is then weighed in opposition to danger elements and price of capital earlier than Temasek decides if the funding will likely be worthwhile.
What’s extra, relying on the dimensions and nature of the funding, both quarterly or month-to-month evaluations are carried out to measure in opposition to the unique thesis.
3. Administration high quality is essential
Administration high quality is without doubt one of the high issues that Temasek seems at, because the capabilities of the leaders operating the enterprise matter. Throughout COVID-19, this was more durable to evaluate because the Temasek workforce 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 value repeating.
“We’re mid to long-term buyers, and never everlasting buyers.”
Not like 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 may assist to clarify why Temasek bought Nio (and at an impeccable timing too, earlier than Nio’s inventory value began crashing) proper earlier than the correction.
Threat administration in a globally unsure world
Whereas Temasek believes that progress will proceed to gradual whereas inflation stays elevated, they are going to 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 isn’t proof against durations of great drawdowns as effectively.
However extra importantly, Temasek’s funding posture is to trip out brief 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 greater year-to-year volatility of annual returns (with greater dangers of adverse returns in anyone 12 months), 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 effectively to recollect this.