Singapore Hedge Fund

Alternative asset management in Singapore

Fullerton aims to extend Singapore’s reach by wooing the European investor

The city state of Singapore punches well above its weight in the world of investment. Between them Temasek Holdings and the Government of Singapore Investment Corporation, the tiny nation’s twin sovereign wealth funds, manage an estimated $400bn (£245bn, €280bn) of assets.

But Singapore is not resting on its laurels; it is about to wade into the congested European asset management industry as part of a plan to raise its assets under management higher still.

Fullerton Fund Management, the funds offshoot of Temasek, currently manages just $2.3bn of external money, in addition to the assets of its parent.

But Fullerton hopes to bolster this tally by launching its first European Ucits funds via the migration of two existing vehicles from the Cayman Islands to Luxembourg before the end of the year.

Gerald Lee, chief executive and founder of Fullerton, believes the move is essential to crack the European market, which currently accounts for just 5 per cent of its customer base.

“We have funds registered in Singapore as well as in the Cayman Islands but there’s just no way we can penetrate the [European] market, if the fund structure is not right. We realise that if we don’t put funds on a Ucits platform we can be marketing here every day, but we won’t get a single cent.”

Fullerton’s initial offerings will reflect its expertise in Asian securities, but with an interesting twist. One fund, Fullerton Asian Equities, is a straightforward relative return product. But the other, Fullerton Absolute Return Asian Equities, is a market timing vehicle which allows the manager significant freedom to switch between equities and cash in anticipation of market rallies and slumps.

Mr Lee is adamant that his managers are able to time the markets in this manner, in spite of the fact that many of the world’s most successful equity managers say such timing abilities are beyond them.

“The whole idea is to take away enslavement to the index. We discover that the moment you do that, actually equity managers do have a very great sense of market timing, contrary to popular belief,” says Mr Lee, who was head of fixed income sales at SBC Warburg Singapore and deputy chief investment officer at Deutsche Asset Management Singapore prior to joining Temasek in 1999.

“I come from a fixed income background, I spent my years in a business as a fixed income manager, so I always found it very perplexing that equity managers claim that they don’t know how to time the market.

“Here I was trading bonds and managing bond portfolios knowing that, actually, it’s not a very difficult call. You don’t need to be somebody with high IQ, you just need to have a very good sense of what is happening.

“You always know when the market is overbought and you know when the market is oversold. Equity managers are capable of market timing and we want to put that to good use.”

Even armed with this information, picking turning points is notoriously hard. During the latter stages of the 1990s bull market, many managers were all too aware that a host of technology, media and telecoms stocks were wildly overvalued, but those managers brave enough to exit these sectors suffered as the TMT bubble continued to inflate, and in many cases lost their jobs as a result.

Mr Lee is aware of the difficulties, but believes the answer is to mandate absolute return managers to beat deposit rates by 5 to 7 percentage points a year over the cycle.

They are likely to exceed this in a bull market, even if they have not participated fully in the rally, giving them the freedom to bail out without being fearful as to their future employment prospects.

“The absolute return guy actually knows how to take money away from the table when things are overheated,” argues Mr Lee. “Where he really adds value is when the market starts falling apart and he has everything very nicely in cash.”

According to Mr Lee, Fullerton first trialled market timing with some of its equity managers five years ago, and the experience has been “very pleasant”.

However, the experience of the Fullerton Absolute Return Asian Equities fund since launch in 2007 has been somewhat less pleasant. During 2008 it lost 37 per cent, against a 52 per cent drop in its underlying Asia ex-Japan index.

Mr Lee largely blames investors for this state of affairs arguing that, with the fund launched during a bull market, investors were unwilling to accept Fullerton’s recommendation that the “neutral” equity weighting should have been 30-50 per cent and instead insisted neutral should be 70 per cent.

“They wanted to have their cake and eat it,” he says.

Fullerton also has plans to go after US investors, but these are unlikely to be firmed up until next year at the earliest, when it is able to start learning some of the lessons from its European push.

In spite of the imminent migration of two of Fullerton’s vehicles from the Caymans, Mr Lee is reluctant to sound the death knell for the Caribbean offshore financial centre, which some see as a potential loser from moves by the US and Europe to stem tax avoidance and tighten regulation of the financial system.

“There is a critical mass of excellence in the Caymans, in terms of people knowing the legal and administrative aspect, so I think they continue to have the advantage,” he says.

Yet, following budget changes in February which improved the tax treatment of funds in Fullerton’s home market, Mr Lee adds: “I can see that more and more hedge funds domiciled in Singapore may not find it necessary to incorporate their funds in Cayman as before.”

Further change may be afoot for Fullerton, however. Last month, Temasek said it would be prepared to list some of its biggest holdings, such as port operator PSA and Singapore Power, adding that even Fullerton itself could be suited to a float.

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Singapore faces rising structural unemployment

Singapore faces the spectre of rising long-term structural unemployment as the economy recovers from the global financial crisis. Structural unemployment occurs when the skills of workers do not meet the needs of employers.

With certain sectors such as manufacturing and electronics lagging behind, Singapore workers will have to be retrained to be employable in new industries such as the gambling industry.

The government’s timely interventions in the form of job credit scheme has helped to keep retrenchments and unemployments to a minimum and lessen the impact of the recession.

However, some workers may find their life-long skills and expertise redundant in a different economic climate blighted by the relentless influx of cheap, foreign labor.

Latest data showed that the number of people unemployed for more than 25 weeks is rising. Official estimates put the rate of long-term unemployment among residents in Singapore at 0.8 per cent as of March this year, up from 0.4 per cent last year.

With no retrenchment benefits or minimum wage to safeguard the interest of workers, they will have to constantly upgrade themselves to stay irrelevant in Singapore’s competitive labor market.

The blue-collar workers will be hardest hit as their jobs, which are labor-intensive in nature can easily be taken up by foreigners willing to work for longer hours at lower pay.

Foreign workers make up almost a third of the population and their increasing numbers have led to concerns and angst among the locals.

Despite the prevailing sentiments on the ground that there are too many foreigners living and working on the island, the government shows no signs of reneging on its pro-foreigner policy to cut back on the numbers.

Foreigners drive up the prices of HDB flats which hit a peak lately. Still, the government insists that HDB flats remain “affordable” as Singaporeans use less than 30 per cent of their monthly pay to finance the mortage loan.

In view of the uncertainty ahead, Singaporeans should think twice before committing themselves to a long-term financial liability. Nobody is guaranteed a job for life in Singapore and one can find himself replaced by a foreigner the next day suddenly without prior warning.

Filed under: temasek, , , , , ,

Goodyear will not be Temasek's next CEO

Singapore government investment fund Temasek said Charles W. Goodyear won’t take over as chief executive because of differences in strategy, a surprising reversal that leaves the wife of the prime minister in the company’s top job.

Goodyear, who had been working alongside outgoing chief executive Ho Ching since March, will leave the sovereign wealth fund next month, Temasek said in a statement Tuesday.

Temasek in February named Goodyear, a former chief executive of the world’s No. 1 mining company BHP Billiton, to take over on October 1 from Ho. The wife of prime minister Lee Hsien Loong had headed Temasek since 2004 and announced her resignation days before the fund said it lost $39 billion, or 31 percent of its assets, between March and November last year.

In tightly controlled Singapore, the appointment of Goodyear, an American, had been seen as a sign that the government was loosening its grip and acknowledging the need for specific expertise from abroad. Now just five months later, that experiment appears to have been derailed.

“It’s embarrassing for sure,” said David Cohen, an economist with consultancy Action Economics in Singapore. “This isn’t the way they normally operate here. Professionalism has been the rule.”

Temasek said the decision to part ways was in its and Goodyear’s interests.

“The Temasek Board and Mr. Goodyear have concluded and accepted that there are differences regarding certain strategic issues that could not be resolved,” the fund said in a statement.

Making the move even more unusual was the long vetting process Goodyear went through before accepting the job.

Goodyear, who has a masters of business administration from the Wharton School of Finance, University of Pennsylvania, said in February he had been in talks with Temasek for the previous 15 months.

“Surprising is the word,” Cohen said. “He was about to command a substantial portfolio. You wouldn’t think he’d walk away from that very easily.”

Temasek’s investments were worth $84 billion as of Nov. 30.

Ho, who has a master’s degree in electrical engineering from Stanford University, said in February she would step away from the day-to-day operations of the fund.

“Chip brings capabilities that I don’t have,” Ho said at the time. “I don’t see myself as needing to direct it (Temasek) in any way.”

Singapore’s Ministry of Finance is Temasek’s only shareholder. The company, which is smaller than the city-state’s other sovereign wealth fund, the Government of Singapore Investment Corp., owns large stakes in many of the country’s biggest companies, including Singapore Telecommunications and Singapore Airlines.

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Temasek,Bank of China unit plans $1-2 bln fund

Singapore’s Temasek is in talks with a unit of Bank of China to launch a US$1 billion to US$2 billion investment fund to focus on fast-growing infrastructure projects across the vast nation, sources said on Thursday.

Talks between Singapore’s sovereign wealth fund andvBOC International, the Hong Kong-based investment banking arm of Bank of China, were in early stages but both had agreed on the general idea of the fund plan, initiated by the Chinese bank, said the sources with direct knowledge of the plan.

Temasek and Bank of China aimed to set up a joint ventue to manage the fund, which would seek investment opportunities emerging from China’s 4 trillion yuan ($585.5 billion) economic stimulus package launched late last year, the sources said.

The sources declined to be identified as negotiations between the two parties are confidential.

With Reuters.

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Sovereign Funds back in business?

The sovereign-wealth funds are stirring. After going quiet as markets crashed and some high-profile investments in U.S. financial companies went awry, the huge pools of capital are back doing deals.

China Investment Corp. is planning a $500 million investment in Blackstone hedge funds and took part in Morgan Stanley’s recent rights issue. The Qatar Investment Authority is considering an investment in Porsche. And with the oil price back above $70, cash is flowing back into Middle East funds.

[foreign affair]

The moves come at a time when significant new investments by SWFs — with between $2 trillion and $3 trillion under management according to the IMF — have been thin on the ground. Figures from Dealogic put the value of cross-border equity investments by SWFs so far this year at $21.1 billion. But that is flattered by the $12.5 billion conversion of Citigroup preferred shares held by Singapore’s GIC and the Kuwait Investment Authority into common stock. Last year, total investments were $46.9 billion, and they reached $55 billion in 2007.

But as SWFs regain their risk appetites — no doubt helped by successful deals such as the recent profit Abu Dhabi’s International Petroleum Corp. recently made selling most of its $5.6 billion stake in Barclays Bank — they could be somewhat different investors. Some face serious criticism at home for losses made, especially on Western financial institutions during the crash. In China, for example, many wonder why CIC doesn’t spend its cash supporting the country’s own companies more.

Those who have had dealings with CIC say it is likely to focus more on investing in resource sector and alternative energy companies. Abu Dhabi’s IPIC, after selling out of Barclays, says it is pursuing “hydrocarbon-related” opportunities. Singapore’s Temasek, meanwhile, already has been reorienting its portfolio more toward investments in Asia and Singapore itself.

It seems probable funds will try to invest both closer to home, and in industries that fit more neatly with their own countries’ policy objectives. When they venture overseas, they are also likely to have learned from their mistakes and to be savvier in structuring deals.

But as SWFs get more confident, foreign investments are likely to remain vital. First, capital constrained Western companies need deep-pocketed investors, so political opposition to SWF deals could be more muted than before. That is particularly true if funds are smarter in positioning their investments as strategic partnerships.

In addition, despite protestations that some SWFs want to focus on Asian opportunities, or investments closer to home, there aren’t enough big opportunities to soak up all the cash. Large, liquid Western markets are likely to regain their allure.


Jean Viry-Babel
senior partner
VBK partners

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China Ready to Place Bets on Hedge Funds

China Investment Corp. is poised to invest $500 million in a Blackstone Group hedge-fund unit as part of a broad effort to put cash to work while global markets are rallying but remain below earlier peaks.

A hefty injection from China would be welcome news for hedge funds, eager to raise fresh capital after brutal markets and an exodus of investors hurt the industry. It also would offer another sign that some big money is stepping off the sidelines as markets stabilize world-wide.

Companies and investors are watching to see if sovereign-wealth funds will once again channel significant money into new deals, after several were burned by high-profile U.S. investments during the financial crisis. Though Middle East funds have ratcheted up spending lately, some remain hobbled by woes at home.

Lou Jiwei

EyePress News/Newscom

STEPPING UP: Lou Jiwei of China Investment Corp. sees opportunity.

CIC is considering opening its checkbook to a handful of hedge funds, a move that comes as CIC Chairman Lou Jiwei is concerned his fund may miss opportunities near the bottom of the market, according to people who work closely with the Chinese fund. That is a reversal in attitude from December, when Mr. Lou said he didn’t have “the courage” to invest in the developed world’s financial institutions because “we don’t know what trouble they are in.”

A spokeswoman for CIC and a spokesman for Blackstone declined to comment.

Set up in 2007 and capitalized by Beijing, CIC is one of the world’s largest sovereign-wealth funds, controlling some $200 billion. The fund already knows Blackstone well, and has suffered some from the relationship. CIC invested $3 billion for a nearly 10% stake in Blackstone just before it went public in 2007, an investment that brought it ridicule in China when the private-equity firm’s shares fell. Since Blackstone’s IPO two years ago this coming Monday, Blackstone shares have dropped about 64%, leaving CIC with a loss of about $1.9 billion.

Still, CIC managers later struck a deal with Blackstone allowing the fund to increase its stake to 12.5%, signaling confidence in the firm’s prospects. And committing capital to Blackstone’s hedge-fund unit is a bet more on its expertise than its stock.

[China Investment Corp.]

That Blackstone division has about $26 billion in investments doled out to hedge funds on behalf of Blackstone clients. One of the world’s largest so-called fund-of-fund managers, Blackstone commands access to some of the biggest funds.

It isn’t clear how much CIC might allocate to hedge funds. In the past, CIC officials have said they plan to farm out up to $80 billion to asset managers, with private-equity firms and hedge funds likely to get a chunk of that capital.

Prominent hedge funds have been talking to CIC for months. Eric Mindich of Eton Park Capital Management and John Paulson of Paulson & Co. are among hedge-fund bosses who have met with CIC representatives, among other Asian investors, in recent months, according to people familiar with the matter. Wall Street insiders see those hedge funds as on a relatively short list of managers more likely than peers to get CIC money, though such decisions could take months.

Investment staffers at the Chinese fund also have sought the hedge-fund managers’ view of the credit crisis and global markets in general.

Last year, James Simons, head of big hedge-fund firm Renaissance Technologies, talked with CIC about selling a stake in Renaissance but didn’t do a deal, people familiar with the matter said.

Spokesmen for the hedge funds declined to comment.

The China fund’s plans don’t necessarily mark a trend toward more global investments by sovereign-wealth funds. Temasek Holdings Pte. Ltd., Singapore’s state-owned investment firm, this year has moved to focus more on Asia investments, selling off stakes in foreign banks at big losses.

In the Middle East, there has been continued deal activity. In March, Abu Dhabi investors snapped up a 9.1% stake in Daimler AG. And earlier this month, the government-backed investment company of Qatar said it is considering a deal to invest in Porsche Automobil Holding SE. The buying comes as the region’s fortunes have started to turn around, thanks in large measure to climbing oil prices.

But some big Mideast players remain reined in. Kuwait, hobbled by political infighting and a banking crisis, withdrew from a planned joint venture with Dow Chemical Co. late last year, blaming the global financial crisis. And Dubai, another U.A.E. emirate, is still reeling from its property-market bust and lately has refrained from big international deal-making.

CIC has been ramping up activity. CIC in late 2007 put $5.6 billion in Morgan Stanley convertible securities whose value later plunged. But earlier this month, CIC plowed an additional $1.2 billion into Morgan Stanley. On Tuesday, CIC struck its first known property deal, agreeing to commit 200 million Australian dollars (US$158.9 million) to a financing facility for Goodman Group, Australia’s largest industrial-property trust.

Elsewhere, CIC put $3.2 billion toward a $4 billion fund managed by J.C. Flowers & Co. to hunt for opportunities among financial institutions.


Jean Viry-Babel
senior partner
VBK partners

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Temasek Holdings Investment Performance and Transparency

On 8 June, I wrote in the Straits Times, a newspaper in Singapore that Temasek Holdings should not shy away from risk despite recent losses. Here is the article:

“Temasek’s track record has come under fire of late for a couple of false steps, notably its investments in Merrill and Barclays. These false steps are unfortunate, but so too is a general criticism of Temasek.

Temasek should not shy away from taking risk, particularly now. The last 30 years have seen steady growth in economies and wealth. The democratization of risk through the rise of derivatives, the growth of capital employed in active management across markets, in arbitrage and relative value as well as traditional investing, the widening and deepening of markets, have all contributed to a gradual reduction in continuous risk. Unfortunately this has also stored up gap risk. In the period of calm preceding 2008, however, the risk reward characteristics of investment in general were deteriorating as more capital chased fewer opportunities manifesting in higher correlation between seemingly unrelated investments, the need for more leverage to eke out decreasing levels of return, lower volatility across almost all markets. Risk levels became higher as risk perception became lower. Risk is highest in calm waters. Once the iceberg is sighted and collided with, risk is apparent and is converted from risk to damage.

The Fall of 2008 was such an iceberg. Markets are no longer as risky; they are damaged. For arbitrage and relative value investments, there is no better environment than damaged markets. Investors will be well compensated for policing of spreads, for bringing efficiency and price discovery back to markets. Equities may be cheap or expensive, but given the systemic de-risking of 2008, there are clearly relative value opportunities. Mergers and acquisitions have been more active than expected as companies seek strategic acquisitions, fire sales, consolidations. Bond markets have seen a recovery in issuance and take up has been healthy. Equity recapitalizations have been strong in emerging markets. All these are signs of a global economy healing itself.

The timing of the disposals of Barclays and BoA may have been unfortunate, but in the new world order, financial institutions are likely to be regulated as utilities with lower returns on equity.

The financial crisis represents a step change in the world order where the profligacy of the developed world is exposed and paid for over a period of decades, while the value creation and maturity of emerging markets raise productivity, economic growth and standards of living. Emerging markets are the source of demand and the source of supply of natural resources, whereas service economies in the developed world appear to be sidelined in the value chain. Perhaps there is some method behind Temasek’s new choice of CIO after all.”

The response to the article, from what I guess was mostly be a Singaporean audience, was mostly negative. Most Singaporeans are suspicious of Temasek’s track record and apparent lack of transparency. In many ways, Temasek’s main problem is a public relations one rather than a material one. While I neither defend nor criticize Temasek, I thought I would take a closer look at the objections to address my own questions about the organization.

While Temasek is known for its apparent lack of transparency regarding financial results and the precise details of its investments, the Temasek website provides some information. It provides quite a lot of information actually. But first, Temasek is 100% owned by the Ministry of Finance and is required to report only to its shareholders. One can of course argue that such responsibility should pass through to the citizens of Singapore as well, but that is another discussion.

In 2005,however , Temasek issued Yankee bonds which are a USD public bond issue regulated under the US Securities Act of 1933. Under the Act, these bonds are subject to certain standards and conditions including creditworthiness and reporting standards. Temasek received a AAA rating from Standard and Poor’s and Moody’s in December 2008. Temasek’s group financials are now available on their website dating back to 2004 in some detail.

I cannot comment about the management quality of Temasek. The website provides some investment performance information indicating a circa 18% annualized return on equity since inception. In the absence of volatility or other risk measures, it is difficult to comment on the quality of those returns.

The period of poor performance which is most in the public eye is 2008 where Temasek reported that for the period March to November 2008, the value of its portfolio declined by some 31% from 185 billion SGD to 127 billion SGD. This is a large loss, but the MSCI World equity index fell some 38% in the same period.

Using a rough and ready calculation, Temasek’s NAV increased by roughly 54% from Mar 2004 to Nov 2008. The absence of precisely comparable data means that I am using book value for the March 2004 valuation and market value for the November 2008 valuation. This is conservative I believe given the economic cycle. In contrast, in the same period, the HFRI Hedge Fund Index gained 15%, emerging market bonds (EMBI) gained 15%, global bonds (the old Lehman Agg) gained 19% and the MSCI World Equity Index made a total return of -4.22% with dividends reinvested. Note that the Temasek portfolio is slightly levered at between 0.9 to 1.4 X equity.

It is not a bad performance for an effectively long only private equity, strategic investment mandate.

From Bryan Goh

Jean Viry-Babel
senior partner
VBK partners

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