‘We have turned more cautious’: Singaporean leaders on markets, overcoming challenges, and the power of asking for help

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Sovereign wealth funds are the whales of the investing world: massive forces operating relatively quietly below the surface.

In April, I had the chance to sit down with the head of Singapore's GIC, Chow Kiat Lim, at a forum held by the sovereign fund in San Francisco. GIC doesn't disclose its assets other than to say it manages north of $100 billion, but the research organization Sovereign Wealth Fund Institute pegs GIC's firepower at about $390 billion.

I also was able to spend time with Kai Fong Chng, the leader of Singapore's Economic Development Board, the driving force behind several global companies' decisions to establish a presence in the country.

Personally I learned a lot from both leaders. Below are excerpts from the conversations.

Chow Kiat Lim, CEO, GIC

How has GIC's asset allocation changed in the past few years?

Broadly, GIC runs a multi-asset class portfolio. One of the most important principles we have is diversification because we believe very much that that allows us to get through many cycles for long periods of time. It has been 38 years now, and we have every desire to be around for another 38, and another 38, and so on. What that means is that unless the environment is drastically different, we don’t normally make very big changes to our asset allocation policy.

Having said that, we do make changes to asset allocation or asset mix from time to time, depending on usually two big things: one, our fundamental assessment; and two, valuations.

On both fronts, generally I would say that for risk assets, we have turned more cautious in the last two to three years.

I think the fundamental picture is probably quite well known. In the financial markets, there is actually a lack of volatility — except maybe the fourth quarter of 2018. Other than that, volatility has been very low, but uncertainty actually is very high. I mean, some of the headline developments we read every day — whether it’s geopolitics, all these social issues about inequality, about de-globalization, Brexit, yellow vests, lots of this stuff. The level of uncertainty is very high.

So, on the fundamental side we have a concern that this could dampen growth, as we have already in fact seen. And then on the valuation side, to expect valuations to continue to improve would be a very tall order.

Globally, bond yields are at historic lows still. It’s quite amazing in fact, after 10 years of zero-interest-rate policy we couldn’t get bond yields to be higher. We have enjoyed that, having had bonds in the portfolio for a long time. But the prospective returns are not great. Today’s starting bond yield tells you a lot about the ex-post in, say, 10 years’ time. So, let’s say U.S. bond yields are at 2.6 percent. Ten years’ time, when we look back, it’s very, very likely that we would have generated 2.6 percent per year. And that’s not great. That’s nominal — if you take away inflation you are probably left with almost nothing.

So, we think about other asset classes. We look at the capital market line.

For the same level of risk, expected return for the future is definitely, in our view, going to be lower. As a result, we have dialed back some of our risk.

Within the mix, we have in the last couple of years been raising our exposures to asset classes like private equity, infrastructure, even real estate. Although within real estate, we’re going into the newer kinds of real estate sectors — we’ve been in student housing, in logistics, more perhaps in data centers in recent times.

We also are using slightly different approaches. Sometimes it’s the asset but also how you go about acquiring the asset. Now we partner more with our peers from time to time, the other sovereign wealth funds. Sometimes we partner with developers in areas of real estate. We have been shifting into more specialized sectors, almost in every asset class. We engage more.

How have you thought about managing more assets directly versus acting as a limited partner in other investment firms' funds?

It’s interesting. We actually have quite a large number of external managers in every asset class. We’ve had a long history of working with them. Some go back as far as 30 years.

We have indeed been doing a bit more of so-called direct investing. And that, interestingly, at least in a number of occasions, actually allows us to add value back to the other firms. Sometimes we will call them and say, "We need your expertise in this particular investment. Why don’t you come join us?" Historically, it was more the other way, that we got a call. We still get a lot of the calls. But we are able now to also bring them in, especially for certain sectors or maybe geographic segments, because GIC does have certain areas where we are more active or we have deeper relationships, say in Southeast Asia.

When you do act as an LP, what qualities do you look for in your external money managers?

Making money!

Ability to generate alpha — profit — that’s number one. Number two is that, generally, we do look for co-investment opportunities. Number three is that they have a relationship-driven approach with us.

For example, sometimes they sell some things to us. Sometimes we sell something to them. So, with some of our partners we have really multiple relationships. Sometimes they are even a tenant in our building, or sometimes we are a tenant in their building! Sometimes we find ourselves as shareholders in the same company. If we take that kind of long-term relationship approach, we can do business together for many years.

As the leader of an investment organization, how do you find that the skills required to be successful in investing are changing?

I think there are two parts. One is that there are certain skills which probably never change. For example, in our kind of work we demand integrity. We demand people have the right motivation. And we prize first-principle understanding. So, those things we don’t think change, even with technological developments.

But then there’s a second part. With technology and, generally, the world changing, we do require our people to acquire more new technical skills. For example, we are looking at a new way of building earnings model, moving away from Excel. Then of course you have to go and learn a new tool.

So, there will be more and more of that. But the key is having the motivation, the openness, to go and explore and try.

Maybe one more thing I would add is really this willingness to take risk and fail. As an investment organization, we kind of know that it is very unlikely that you can get return without taking any risk. That would be nice. But really now it goes beyond just that general idea.

Even in the way we run our operations, we have to be able to deal with taking some risks. But there, again, I would say as an investment organization we have certain skills which I find really handy to deal with this. For example, portfolio approach. You don’t have to risk the whole thing. You can set aside some capital to try the newer, less tested, the more risky thing. So, I think as an investment company we have the ability to deal with that. We understand the concept of risk budget versus risk appetite.

So, a lot of the investment concepts are, I find, super useful as we deal with change, because change has upside and downside. You can relate a lot of that to investment concepts.

Kai Fong Chng, managing director, Singapore Economic Development Board

What's the role of Singapore's EDB?

Our ultimate mission is to create jobs and opportunities for Singaporeans. We do that by partnering with companies big and small all over the world. And we think about industry development, economic development, in a very broad ecosystem way.

It’s not just about attracting the top companies to set up shop in Singapore, but it’s about building capabilities in our workforce, in our economy; finding adjacencies; linking them up with our local businesses in Singapore; then creating jobs and opportunities for our Singaporean workers.

What are some of the challenges in doing that?

Many challenges exist simply because Singapore is small — we are just 5.6 million people — so we are not immediately thought of as a market to go to. There are many other challenges we have because of our size: constraints in resources, whether it’s land, whether it’s labor, whether it’s carbon, whether it’s manpower.

What kinds of companies so far have been attracted to Singapore, and why?

Singapore is a country that is now 54, entering our 54th year. When we started, basically Singapore had absolutely nothing, no economy to speak of. And one of the things we benefited from was a UN development team that came down, studied, and said we needed to industrialize.

When we became independent, basically no one gave us a chance. But we said, OK, let’s do two things that go against the grain. One, let’s take an export-oriented approach, whereas everyone else was doing import substitution. Two, let's get multinational corporations in order to build up capabilities.

So, you have a large population with lots of unemployment, no skill whatsoever. The easiest way is to have manufacturing, and we sort of caught on to the whole industrial revolution and manufacturing boom.

So, the first few companies that came to Singapore were really manufacturers, and we started manufacturing low-cost stuff. Because we have low-cost labor, we could easily supply the labor and get factories up and running. We were manufacturing mosquito nets, we had fishing nets, packaging, we had just basically low-cost stuff. And then slowly along the way things started to build up, you build up your capabilities. One company became a couple more companies coming in, providing supplies to each other.

The classic case is what happened in the semiconductor industry. We started off manufacturing, just doing packaging for hard disk, then we moved on to hard disk media, and because of adjacencies with other electronic industries we then moved to semiconductors. Then from semiconductors you can branch off to many other different fields. That’s the whole concept of economic development. And now even with semiconductors you can branch off into internet of things. You can do clean energy, because solar panels use semiconductor-type processing technologies. You can even do agriculture, because now agriculture makes sense in land-scarce Singapore because of the availability of sensors, the availability of AI to optimize climate conditions.

How do your conversations with MNCs [multinational corporations] typically go?

What do MNCs require? Of course they want a good place to do business, they want trust, but they want also talent. And so, when we first started out, one of the things we promised all these companies was, OK, our workers are not skilled, but what we can do is work with you, set up training institutes, and then we train them up, we skill them up, they join your workforce.

And we have a history of good tripartite relations — one of the things that’s unique about Singapore is that we hardly have any strikes because our unions see themselves as partners of employers and as partners with government. And so, when it comes to negotiating wage increases, when it comes to dealing with union issues, it’s always done amicably. And the unions are adequately resourced to do that because they themselves have cooperated, so they actually run businesses, they know how businesses work, they can read balance sheets and financial statements.

Essentially everyone takes a much longer-term view. We are very conscious of our vulnerability in size, so we sort of know that you’ve got to take a long-term view when it comes to dealing with businesses.

Is there a model of economic development elsewhere in the world that you follow?

There are many models we have to learn from: every single person, every single country, every single company.

When it comes to dealing with companies, we have got to speak their language. For example, when I engage Microsoft or Google, my conversation doesn’t just say, oh, we want you to put your engineering team in Singapore, we want to build an engineering center. I think that would be quite rudimentary. What we want to do is to understand, what’s your five-year strategy, how do you look at markets, what sort of activities do you think these markets would actually contribute to Google’s strategy? From there, we then figure out, what does Google need to actually make that happen?

Some things we are actually quite conscious that Singapore can’t provide. For example, there is no way we can provide the market. But we are in close proximity to enough of the big markets in ASEAN — 650 million people — with such great demographics.

We know our place in life: We are never going to be the big country. But we can play an important role, a significant role.

Our work at EDB is to talk to companies, figure out where the space in which we can play, and bring to bear some of the resources that we have already built up over time: our attractiveness as a place for talent; rule of law; livability; we are highly connected to the rest of the world in terms of trade; we are right smack in the middle of, I think, the fastest-growing region in the world right now; we have a great financing ecosystem going on, with most of the major banks; we have a stable currency.

I've read that you attribute much of your success to asking for help.

All the signals around us are telling us, 'You’ve got to perform, you’ve got to do well.' So, you are always putting up a front, you are always trying to project the best self to everyone else.

Because you are feeling that all the way from school to the professional world, you are always feeling that people are judging you or saying, is this guy going to make it to the next level, is this guy going to be the next CEO? And I think that prevents people from asking for help, and that prevents you from actually learning.

One person once said to me, "Who do you think remembers you more, the person that you have helped or the person that you have asked for help?" And that got me thinking: The person that you have helped may not remember you as much as the person who you have asked for help, because he or she has invested in you and he or she is interested in your success. I think that’s something that we often forget, and that requires a certain humility.

The more you can do this, the more you can expand toward authenticity, the more you are comfortable with who you are and who you are not. That’s where you start to find the magic in working with different people, adapting to each other, strengths and weaknesses, and pride in work and life.