Singapore's two wealth funds

Circumstances make Singapore's two wealth funds different from most
By Ng Baoying, Channel NewsAsia | Posted: 29 January 2008 2233 hrs

SINGAPORE: Among countries with sovereign wealth funds (SWFs), Singapore stands out for a few reasons.

First, it is commonly seen as having not one but two such funds, both of which are grouped among the top seven state wealth funds in the world, with more than S$100 billion in assets apiece.

In addition, the Government of Singapore Investment Corporation (GIC) and Temasek Holdings were born out of circumstances different from that of nations with surplus reserves.

So why and how is Singapore's approach to wealth funds different? How are GIC and Temasek different from each other?

To many in the business community, Norway stands out for its sovereign wealth fund.

Set up in 1995 to preserve its oil wealth, Norway's Government Pension Fund is funded by surplus cash from commodities, just like many other sovereign wealth funds.

Gerard Lyons, group head of global research at Standard Chartered, said: "Singapore is different because Singapore not only has two funds, but unlike some of the other big funds, it doesn't have a natural commodity base from which to build its sovereign fund… For example when you look at Europe, Norway set up a fund when it discovered oil, Britain didn't. One could argue that (the) UK was looking very much at current consumption, not long-term investment. Norway, in contrast, was building up future investments. In many respects Singapore was of that ilk, thinking longer term, how to build up a future wealth of its nation."

Both Temasek Holdings and GIC look across the globe for investments with the best returns. But that is where the similarities end.

One big difference between the two is that GIC manages Singapore's foreign reserves while Temasek started with some government assets as capital.

Temasek Holdings' executive director Simon Israel said: "The word 'sovereign wealth fund' by nature almost implies fund manager. We are not a fund manager. As a private company we own our assets. That's a key point of differentiation. So we act (on) our own, not as managers. If you look at Temasek, we began at inception with S$350m of state assets transferred to us by the government. There were subsequent injections over the years. But it's the management of that investment portfolio over the years that has grown in excess of S$160 billion that we term our 'sweat capital', which is our source of funding, together with a modest level of debt."

"So unlike other SWFs we're not managing currency reserves, oil surpluses or anything like that. It's purely commercial investment activity and that's what drives us," he added.

If one defines a sovereign wealth fund as a fund manager for a country's reserves, Temasek said it will then not be classified as one.

Mr Israel said: "We are state-owned but not state-directed… Temasek was established as a private company on a commercial charter to undertake these investments. Together with that we have a board of directors, a majority of whom are independent directors from the private sector. And we have a governance framework which is not dissimilar to that of a listed company."

As part of a push towards greater transparency, Temasek has opened its books to international ratings agencies for its credit rating. It also publishes an annual report in which it outlines its financial performance.

Temasek and GIC are autonomous in the way they operate.

GIC's deputy chairman and executive director Tony Tan said: "Let me say categorically that Temasek and GIC operate entirely separately. We have no common members on the boards of directors and no common management members. Temasek and GIC are independent companies. We don't consult each other and I don't see that there is any reason to regard Temasek and GIC as working in constant."

"They are entirely separate corporations, although of course both are owned by the Singapore government. We endeavour that this separateness of Temasek and GIC is maintained," he added.

Analysts said both GIC and Temasek have their strengths, and there is value in having them separate from each other.

Vice dean of finance and administration at the National University of Singapore Ho Yew Kee said: "It's a good way of doing things… not to put all your eggs in one basket… They started off as two different funds - one at home, one overseas. At some point in time, as their sizes grew, their objectives slightly overlap. But yet there's no necessity to merge them… into one."

Temasek was established in 1974, and GIC in 1981. - CNA/ac