[h=1]RETURNS CLAIMED BY TEMASEK ARE NONSENSE: HERE IS WHY[/h]
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9 Jan 2015 - 6:36pm
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As a foreigner in Singapore with an inclination for wealth management, one of the issues that have caught my interest (apart from the Roy Ngerng story) is the curiously high returns reported by Temasek. As Christopher Balding of Peking University has pointed out, the returns claimed by Temasek are implausibly high. And if my years in finance have taught me one thing it is the following: if something looks too good to be true, it usually isn’t true.
Based on this, I decided to dig into Temasek’s reports to try to understand whether their postulated return figures are real or not.
The below chart, taken from the 2014 annual report of Temasek, presents the average annual return in the 40 year history of Temasek as being an incredible 16%.
However, the chart also shows that the average return for the last 20 years has been much lower, only 6%. This level of return seems more in line with typical returns for an investor the size of Temasek.
However, if the average returns the last 20 years has been 6%, and the average returns during the 40 year history of the fund has been 16%, that means the returns achieved in the first 20 years of Temasek’s life must have been very very high. A quick back of the envelope calculation tells me that the average return in the first 20 years must have been in the range of 30% per year.
Achieving 30% return on average for 20 years is, simply, incredible.
To better understand what happened in the first 20 years of Temasek’s history, the following chart, also from Temasek’s 2014 annual report, proves helpful.
The initial value of the fund in 1974 is claimed to be S$354 million. Using my ruler, it seems the fund grew from this initial value to around S$12 billion in 1992. This implies an average annual return of around 22%. If this is pretty spectacular, what happened from the year 1992 to 1994 is even more so. Within this two-year period, the fund size increased from S$12 billion to more than S$65 billion. A return of more than 450% in 2 years. Wow. If this is real, someone deserves a medal and, of course, a huge bonus.
It seems, however, that something fishy is going on between 1992 and 1994. And this “something”, as it is indicated on the chart, seems to be the listing of SingTel. In 1993 SingTel was transferred from the government to Temasek and in November that year the company was listed on the Singapore Exchange. Did Temasek, in the short period between taking over SingTel and listing it, create a lot of value, or is it more likely that SingTel was transferred to Temasek for a price much below its real market value?
In a recent article published on Singapore government’s website, the Ministry of Finance gives us a clue (my underlining) as to which of these two possibilities is more likely:
“Q13. What factors have contributed to Temasek’s performance over time? Has Temasek’s performance benefited from the “transfer of Government’s assets” such as SingTel and Changi Airport Group (CAG) to its balance sheet?
Temasek’s Total Shareholder Return since inception (1974) was 16% p.a. in SGD terms. This TSR since inception would have benefited from the transfer of Government companies such as SingTel to Temasek, their transformation, and the subsequent listing of these assets. […]
The transfer of Government companies such as SingTel to Temasek ‒ and the subsequent listing of these assets ‒ had contributed to Temasek’s total shareholder returns by market value.
For the period after 1 April 2002, the performance of this portfolio of earlier Temasek assets did not have any “boost” from IPO listings.”
Even though the MOF is not explicit in how these asset transfers “boosted” Temasek’s returns, or by how much, one gets the impression that assets indeed were transferred from the government to Temasek at below market values.
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Indeed, this suspicion is further corroborated by both this doctoral thesis (page 22) and in this blog post. In short, what seems to have happened is that the government of Singapore transferred SingTel to Temasek at the book value of S$2.5 billion (according to the doctoral thesis) while the actual market value of the firm (as revealed by its listing on the stock exchange) was around S$40 billion. The difference between the book value and the market value, almost S$40 billion, explains the bulk of the big jump in the size of Temasek’s portfolio from 1992 to 1994.
Transferring assets virtually for free to Temasek, then having Temasek mark these assets to market and claiming to have achieved fantastic returns is, of course, pure nonsense. It is a bit like a young boy with S$100 in his piggy bank claiming he has managed 50% return on his assets when someone gives him an ang pao of S$50.
How much have the “gifts” received in 1992-94 artificially boosted the returns of Temasek? A simple back of the envelope calculation shows that Temasek’s average returns for the past 40 years would be reduced by 4 percentage points if one extracts the gifts it received between 1992 and 1994. Instead of 16% return per year in the last 40 years, the return without these gifts is only around 12%.
However, if assets were transferred to Temasek at book values in 1992-94, there is no reason to believe this was not also the case with other assets transferred in the 1990s and before. How much such other “gift” transfers have artificially boosted Temasek’s return can only be speculation. But as an example, if we assume that the initial portfolio of Temasek, the 35 companies it started with in 1974, had a real market value of S$700 million, and not the S$354 million stated in Temasek’s reports, average annual return in the 40 year period would be another 2 percentage points lower, i.e. 10%. If the initial value of these companies were actually S$1000 million, the average annual return in the 40 year period would be 9%.
As Christopher Balding shows in his paper, the average annual returns earned by the broad stock market indices in the period have been around 7-10%. That is most likely also what Temasek has earned, if one does the calculation correctly.
By presenting returns the way Temasek does, a false impression is given that the management of Temasek has performed very well. In reality, their performance is most likely very similar to what other investors have achieved and hence nothing much write home about. To borrow a bit from Ngerng: when Temasek presents return the way they do, what they are actually doing is to misappropriate performance.
An investment manager that uses shady tricks to dress up its return figures is, unfortunately, all too common. However, what is both worrying and disappointing, is that the Government of Singapore, and in particular the Ministry of Finance, allow this to happen. For the long-term survival of Temasek (and the GIC) as wealth management funds for Singapore, it is essential that people trust the reports issued by the funds. Reports containing nonsense return calculations do not, and should not, inspire confidence.
The government should instruct Temasek to improve the quality of its reporting, including how returns are calculated and presented. If Temasek’s board and management team are unable to do this, the government should look for new team to run the fund. When recruiting a team to run Temasek, the following can be a useful rule of thumb for the government: If you cannot calculate returns properly, you should not manage a S$223 billion fund.
F Reedom
F Reedom is a pseudonym. A pseudonym is used as the author and his family are afraid of repercussions from the PAP government if full name is used. The author hopes to one day be able to express his views in Singapore without fear.
The author has worked in financial consultancy and wealth management. He has a post graduate degree in finance and economics from a world leading university. He has intimate knowledge of asset management in general and management of sovereign wealth funds in particular.
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9 Jan 2015 - 6:36pm
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As a foreigner in Singapore with an inclination for wealth management, one of the issues that have caught my interest (apart from the Roy Ngerng story) is the curiously high returns reported by Temasek. As Christopher Balding of Peking University has pointed out, the returns claimed by Temasek are implausibly high. And if my years in finance have taught me one thing it is the following: if something looks too good to be true, it usually isn’t true.
Based on this, I decided to dig into Temasek’s reports to try to understand whether their postulated return figures are real or not.
The below chart, taken from the 2014 annual report of Temasek, presents the average annual return in the 40 year history of Temasek as being an incredible 16%.
However, the chart also shows that the average return for the last 20 years has been much lower, only 6%. This level of return seems more in line with typical returns for an investor the size of Temasek.
However, if the average returns the last 20 years has been 6%, and the average returns during the 40 year history of the fund has been 16%, that means the returns achieved in the first 20 years of Temasek’s life must have been very very high. A quick back of the envelope calculation tells me that the average return in the first 20 years must have been in the range of 30% per year.
Achieving 30% return on average for 20 years is, simply, incredible.
To better understand what happened in the first 20 years of Temasek’s history, the following chart, also from Temasek’s 2014 annual report, proves helpful.
The initial value of the fund in 1974 is claimed to be S$354 million. Using my ruler, it seems the fund grew from this initial value to around S$12 billion in 1992. This implies an average annual return of around 22%. If this is pretty spectacular, what happened from the year 1992 to 1994 is even more so. Within this two-year period, the fund size increased from S$12 billion to more than S$65 billion. A return of more than 450% in 2 years. Wow. If this is real, someone deserves a medal and, of course, a huge bonus.
It seems, however, that something fishy is going on between 1992 and 1994. And this “something”, as it is indicated on the chart, seems to be the listing of SingTel. In 1993 SingTel was transferred from the government to Temasek and in November that year the company was listed on the Singapore Exchange. Did Temasek, in the short period between taking over SingTel and listing it, create a lot of value, or is it more likely that SingTel was transferred to Temasek for a price much below its real market value?
In a recent article published on Singapore government’s website, the Ministry of Finance gives us a clue (my underlining) as to which of these two possibilities is more likely:
“Q13. What factors have contributed to Temasek’s performance over time? Has Temasek’s performance benefited from the “transfer of Government’s assets” such as SingTel and Changi Airport Group (CAG) to its balance sheet?
Temasek’s Total Shareholder Return since inception (1974) was 16% p.a. in SGD terms. This TSR since inception would have benefited from the transfer of Government companies such as SingTel to Temasek, their transformation, and the subsequent listing of these assets. […]
The transfer of Government companies such as SingTel to Temasek ‒ and the subsequent listing of these assets ‒ had contributed to Temasek’s total shareholder returns by market value.
For the period after 1 April 2002, the performance of this portfolio of earlier Temasek assets did not have any “boost” from IPO listings.”
Even though the MOF is not explicit in how these asset transfers “boosted” Temasek’s returns, or by how much, one gets the impression that assets indeed were transferred from the government to Temasek at below market values.
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Indeed, this suspicion is further corroborated by both this doctoral thesis (page 22) and in this blog post. In short, what seems to have happened is that the government of Singapore transferred SingTel to Temasek at the book value of S$2.5 billion (according to the doctoral thesis) while the actual market value of the firm (as revealed by its listing on the stock exchange) was around S$40 billion. The difference between the book value and the market value, almost S$40 billion, explains the bulk of the big jump in the size of Temasek’s portfolio from 1992 to 1994.
Transferring assets virtually for free to Temasek, then having Temasek mark these assets to market and claiming to have achieved fantastic returns is, of course, pure nonsense. It is a bit like a young boy with S$100 in his piggy bank claiming he has managed 50% return on his assets when someone gives him an ang pao of S$50.
How much have the “gifts” received in 1992-94 artificially boosted the returns of Temasek? A simple back of the envelope calculation shows that Temasek’s average returns for the past 40 years would be reduced by 4 percentage points if one extracts the gifts it received between 1992 and 1994. Instead of 16% return per year in the last 40 years, the return without these gifts is only around 12%.
However, if assets were transferred to Temasek at book values in 1992-94, there is no reason to believe this was not also the case with other assets transferred in the 1990s and before. How much such other “gift” transfers have artificially boosted Temasek’s return can only be speculation. But as an example, if we assume that the initial portfolio of Temasek, the 35 companies it started with in 1974, had a real market value of S$700 million, and not the S$354 million stated in Temasek’s reports, average annual return in the 40 year period would be another 2 percentage points lower, i.e. 10%. If the initial value of these companies were actually S$1000 million, the average annual return in the 40 year period would be 9%.
As Christopher Balding shows in his paper, the average annual returns earned by the broad stock market indices in the period have been around 7-10%. That is most likely also what Temasek has earned, if one does the calculation correctly.
By presenting returns the way Temasek does, a false impression is given that the management of Temasek has performed very well. In reality, their performance is most likely very similar to what other investors have achieved and hence nothing much write home about. To borrow a bit from Ngerng: when Temasek presents return the way they do, what they are actually doing is to misappropriate performance.
An investment manager that uses shady tricks to dress up its return figures is, unfortunately, all too common. However, what is both worrying and disappointing, is that the Government of Singapore, and in particular the Ministry of Finance, allow this to happen. For the long-term survival of Temasek (and the GIC) as wealth management funds for Singapore, it is essential that people trust the reports issued by the funds. Reports containing nonsense return calculations do not, and should not, inspire confidence.
The government should instruct Temasek to improve the quality of its reporting, including how returns are calculated and presented. If Temasek’s board and management team are unable to do this, the government should look for new team to run the fund. When recruiting a team to run Temasek, the following can be a useful rule of thumb for the government: If you cannot calculate returns properly, you should not manage a S$223 billion fund.
F Reedom
F Reedom is a pseudonym. A pseudonym is used as the author and his family are afraid of repercussions from the PAP government if full name is used. The author hopes to one day be able to express his views in Singapore without fear.
The author has worked in financial consultancy and wealth management. He has a post graduate degree in finance and economics from a world leading university. He has intimate knowledge of asset management in general and management of sovereign wealth funds in particular.
