There are inherent risks whenever we invest, divest, or hold our assets, and wherever we operate.
As an owner, we are fully flexible in our ability to deploy capital across listed and unlisted assets. We do not have predefined concentration limits or targets for investing, whether by asset class, country, sector, theme or single name. We also have the flexibility to take concentrated positions and adopt a long investment horizon.
Our portfolio of mostly equities means higher year-to-year volatility of annual returns, including a higher risk of negative returns, such as for the year ended March 2016. The higher risk of negative returns in some years comes with an expectation of higher positive returns over the long term.
We promote a culture of risk awareness and balanced risk taking. Our risk-sharing compensation philosophy aligns the interests of employees with those of the shareholder, puts the institution above the individual and emphasises long term over short term. Balanced risk taking applies to both our investments as well as building institutional capabilities.
Our risk management framework covers strategic, performance and operational risks. We track and manage risks proactively and through cycles. There are designated risk owners for specific risks at Company or unit levels. We manage our leverage and liquidity conservatively for resilience and flexibility, even in times of extreme stress.
|Strategic risks||Performance risks||Operational risks|
To minimise operational risks, we embed risk management in our systems and processes. These include our approval authority delegation, company policies, standard operating procedures and risk reporting to our Board.
We have disciplined processes to ensure that various perspectives are always considered. Investment proposals are submitted under a two-key system, for instance by market and sector teams, to our investment committee. Depending on the size or risk significance, these proposals may be escalated to our Executive Committee or Board for final decision. Functional teams provide additional specialist perspectives and independent reviews. Risk considerations for individual investments include reputation, business, legal and regulatory, tax, funding, and key management risks.
Country and sector risks are factored into our risk-adjusted cost of capital for each investment. We seek to buffer risk through valuation discipline.
Legal & Regulations
We comply with all obligations under Singapore laws and regulations, including those arising from international treaties. We also comply with the laws and regulations of the jurisdictions where we have investments or operations.
Our Legal & Regulations department (LR) ensures that policies, processes and systems are consistent with applicable laws, and aligned with Board directives. For instance, our policy on derivative transactions permits only personnel authorised by a board resolution to enter into such transactions within tightly defined scopes and limits on behalf of specific designated entities.
LR monitors regulatory reporting compliance through robust securities tracking systems. Regulatory requirements and monitoring systems are continually reviewed and updated to track changes in laws and regulations.
Our Temasek Code of Ethics and Conduct (T-Code) and its related policies guide our Board directors and staff in their daily dealings and conduct. With integrity as a key overarching principle, T-Code policies on probity cover areas such as anti-bribery, whistle-blowing, management of confidential information, and prohibition against insider trading. Our annual staff bonus plans include T-Code compliance requirements.
Our policy permits only personnel authorised by a board resolution to enter into derivatives transactions within tightly defined scopes and limits.
Business Continuity and Incident Management
Our contingency management framework helps ensure business continuity and manage potential risk incidents arising from safety, security and other threats.
We care for the safety, security and well-being of our staff and their families during emergencies. For example, we provided supplies of N95 masks to our Singapore and Beijing staff during episodes of severe haze.
As we expand globally, we are ready to provide assistance to our staff wherever they operate.
Temasek has the flexibility to take large stakes in investments in expectation of superior returns. Our concentration profile is the result of such investments in aggregate. Our top 10 holdings represent 46% of the total net portfolio value.
Our largest geographic concentration by underlying assets remains in Asia, with 29% and 25% in Singapore and China respectively as at 31 March 2016. The US is third largest at 10%.
Our largest sector concentration as at 31 March 2016 was in the telecommunications, media & technology sector, at 25% of the total portfolio, up from 24% a year ago.
Singtel remains our largest single name concentration at 13% of our portfolio in March 2016, down from 19% in March 2006.
Our portfolio of mostly equities means higher year-to-year volatility for our annual returns.
Risk to Short Term Reported Returns
Our mark to market policy aims to reduce the behavioural risk of holding on to poor investments for fear of reporting realised losses. As a result of valuing our listed investments on a mark to market basis, there is consequently greater volatility in our reported annual results.
In any given year, our net portfolio value may see a once-in-20-years swing of as much as 30-40%. We saw this during the Global Financial Crisis, when our net portfolio value fell 30% in one year, only to rebound 43% the next year.
We use a range of formal market risk metrics to track the forward looking volatility of our portfolio. These include portfolio Value-at-Risk (VaR), the 12-month forward looking Monte Carlo simulation of the portfolio, and general market risk indicators such as the CBOE Volatility Index (VIX).
As at 31 March 2015, our one-year VaR was S$38 billion or 14% of net portfolio.
These metrics have all signalled higher risks since the third quarter of 2015, when market sentiment towards China deteriorated and global commodities prices declined further. Broader long term risks may still be masked by successive and extremely accommodative central bank policies. Global, central banks’ ability to effectively manage financial stability risk is increasingly being questioned.
VIX Trend and Temasek's VaR as % of Portfolio Value (April 2005 to April 2016)
Looking into the immediate future, we use Monte Carlo simulation based on past market data to give a sense of the likelihood of a range of returns at the end of the next 12 months.
Applied to the current Temasek portfolio mix, our Monte Carlo simulation shows a five-in-six chance that our one-year portfolio returns can range from -21% to +32%. This is more biased towards the negative and just slightly wider than the 10-year average of -19% to +33%.
In the chart below, the Monte Carlo simulation curves represent the likelihood of one-year returns for some of the recent financial years. Narrower curves mean less volatility compared to the broader, flatter curves of the 2008/09 Global Financial Crisis years.
Our mark to market policy aims to reduce the behavioural risk of holding on to poor investments for fear of reporting realised losses.
(as at 31 March)
Simulation of 12-month Forward Portfolio Returns
(as at 31 March)