How Temasek Invest?

Temasek Holdings experienced a 5% decrease in the performance of its investment portfolio in the previous year. It is essential to clarify that this post does not aim to criticize, as I acknowledge the distinctive difficulties faced by a large investment institution like Temasek, which cannot be directly compared to individual investors. Temasek encounters challenges of managing significantly larger capital, pursuing organizational objectives, and safeguarding strategic interests.

Temasek's investments are heavily concentrated in Asia, accounting for 63% of its portfolio as of March 31, 2023. Unfortunately, Asian stocks have not rebounded since last year, whereas European and US stocks have shown better performance. However, due to their smaller exposure, these regions were unable to significantly uplift Temasek's portfolio. Even within the US market, the recovery was limited to Big Tech stocks, which Temasek does not have big positions in. Hence, the geographical allocation partly explains for the portfolio's decline.

Another notable characteristic of Temasek's portfolio is that over half of it consists of unlisted assets.

These assets encompass Singaporean private companies with strategic interests, such as PSA and SP Group, which manage Singapore's port operations and electricity and gas distribution, respectively. Additionally, foreign companies and private equity funds contribute to this portion of the portfolio. Valuing these unlisted assets accurately presents a challenge since they are not traded on stock markets. Consequently, the actual returns depend heavily on Temasek's valuation approach. Given the current weak funding rounds, some private companies, especially younger startups, may experience reduced valuations through down rounds. However, mature companies like SP Group are expected to fare better.

Temasek provided a rather good summary of the global situation. The rise of China has led to a multi-polar world with heightened geopolitical tensions. Consequently, there has been a shift towards protectionism, building alliances, and ring-fencing against geopolitical opponents, as opposed to the previous goal of globalization. The pursuit of efficiency through outsourcing to cheaper countries has taken a back seat to supply chain de-risking and rewiring. Furthermore, governments have expanded their roles in imposing and enforcing policies. With higher interest rates and inflation, the "growth-at-all-cost" model is no longer feasible, and sustainable growth, including considerations for climate change, has become more pressing. Lastly, the popularization of AI presents new opportunities for productivity enhancement.

While Temasek provided an accurate overview of the geopolitical landscape, there appears to be a lack of portfolio considerations regarding the heightened geopolitical tension. As a result, it is probable that Temasek will maintain a comparable level of exposure to both US and Chinese companies. In contrast, Temasek placed more emphasis on discussing sustainability and the integration of environmentally-friendly practices into its portfolio.

Temasek has outlined its future portfolio direction, which will involve allocating 60-70% to Singaporean private companies, growth stocks (compounders), and investment funds. The remaining 30-40% will be dedicated to emerging trends. I notice that there isn't a significant deviation from its current portfolio. It is understandable as Temasek intends to retain its core Singaporean private companies due to their strategic importance. However, personally, I believe it would be more prudent to allocate a smaller portion, around 10-20%, to the riskier new trends, considering their higher risk nature and the possibility of these trends fading out over time.

Notably, Temasek has become more actively involved in its portfolio companies in recent years. Examples include raising funds for SIA during the Covid-19 pandemic, restructuring Sembcorp Industries, Keppel Corp, Seatrium, and Capitaland. So far, Temasek has successfully unlocked significant value in these companies.

Lastly, Temasek holds no fixed-income investments, as its entire portfolio is composed of direct equity holdings in companies or investments made through funds. This preference aligns with my own inclination as a stock-oriented investor, as stocks historically offer some of the highest returns among asset classes when taking a long-term view.