The global economy remains vulnerable to further shocks, with more challenges in Europe over the next 12–24 months. Further out in this decade, both Asia and the USA will have their own sets of challenges.
Meanwhile, the steady global recovery of 2010 faltered with the Arab Spring unrest of early 2011, followed by the Eurozone debt spasm of late 2011.
Amidst this volatility, our portfolio remained resilient. We closed the year ended 31 March 2012 with a steady S$198 billion portfolio, including a comfortable net cash position.
Portfolio Highlights
Total Shareholder Return (TSR) measures returns to our shareholder as if it held our portfolio directly. This includes dividends to our shareholder and excludes capital injections from our shareholder.
Our TSR in Singapore dollar denomination was 1.50% for the year.
Three-year TSR was 15% compounded annually, with longer term 10-year and 20-year TSRs at 10% and 15% respectively. TSR since inception in 1974 was 17%.
Group shareholder equity last financial year was at a record S$158 billion, including fair value reserve of S$12 billion, while group net profit was a healthy S$11 billion.
Investing for Our Future Generations
In the 10 years since March 2002, we invested almost S$140 billion, and divested just under S$90 billion as an active investor in Asia.
In the process, we reshaped our portfolio from one largely focused on Singapore to one riding on the twin transformations of Asia and Singapore, growing it from S$77 billion at end March 2002 to S$198 billion a decade later.
Investments made since March 2002 delivered over 18% annualised returns to Temasek over the last 10 years, while blue chip investments we held as at end March 2002, such as SingTel and Singapore Airlines, delivered a steady 11% annualised returns to Temasek over the same period.
Based on a theoretical simulation of key holdings, had we kept our portfolio as at 31 March 2002 unchanged, and not stepped out actively into Asia, it would have grown to a lower S$165 billion in March 2012.
Last year, we invested a total of S$22 billion, and divested S$15 billion, with net investments of S$7 billion.
As at end March 2012, our exposure to Asia based on the underlying assets of our investments was 72%, down from 77% a year ago. This included our Singapore exposure, steady at around one third over the last five years.
In Singapore, we partnered leading international financial institutions to establish Clifford Capital to undertake project financing in the region.
We collaborated with the Singapore Ministry of Finance to sponsor Heliconia Capital Management, to seed growth capital for Singapore-based small and medium-sized enterprises.
A major investment in the year was the 60:40 joint venture between Malaysia’s Khazanah Nasional Berhad and Temasek to develop land parcels in Singapore. These commercial land parcels were a swap from the Singapore Government in return for Singapore railway land previously used by Malayan Railway1.
Separately, Temasek partnered Khazanah to develop two wellness-related projects in the southern Malaysian state of Johor, with a gross development value of approximately RM3 billion.
Temasek’s stakes in our joint ventures with Khazanah were funded by a capital injection from the Singapore Government. The projects should complete within a three to five year time frame.
The banking sector in China remains a good proxy to the growing Chinese economy and expanding middle income population.
During the year ended March 2012, we added to our stake in China Construction Bank. Post 31 March 2012, we rebalanced our overall banking exposure, including an investment of over S$3 billion in Industrial and Commercial Bank of China.
In total, our exposure to the financial services sector fell from 36% to 31%, mostly reflecting the fall in market valuations.
Australia and New Zealand increased to 14% of our portfolio, while our exposure to North America and Europe increased from over 8% a year ago to above 11%, largely through investments in the energy and resources sector. Our nascent 1% exposure to Latin America grew more than 20%.
Investments in the USA energy and resources sector last year included S$2 billion in FTS International, a shale energy production service provider, and over S$1 billion in The Mosaic Company, a fertiliser producer. These were followed by a S$300 million investment in May this year in Cheniere Energy, the first American company to obtain all relevant regulatory approvals for the export of liquefied natural gas to USA Free Trade Agreement partners, including Singapore.
Other investments post March 2012 in this sector included Kunlun Energy of China, and Ivanhoe Mines, an international mining company with assets in Asia and Australia.
Over the last few years, we cautiously broadened our exposure beyond equities. As at 31 March 2012, we had a gross notional S$600 million of put and call options, reflecting our longer term interest in their underlying equities, and some S$1.3 billion investment in credit funds.
Expanding Our Stakeholder Base
We have expanded our stakeholder base methodically over the years as part of our intent to foster good governance and long term institutional discipline.
In 2004, our 30th anniversary year, we initiated the publication of our annual Temasek Review to share our key financial and portfolio performance. Credit ratings by Standard & Poor’s and Moody’s in 2004 were a prelude to our maiden 10-year Temasek Bond in 2005.
To date, we have issued S$10 billion of triple-A rated Temasek Bonds in Singapore dollars, US dollars and British pounds sterling, with tenors of up to 40 years.
We launched our US$5 billion Euro-commercial Paper (ECP) Programme in 2011 to enhance our short end funding options. This has been assigned the highest short term ratings.
Our Temasek Bond and ECP Programmes underpin our financing framework, providing a flexible balance of long and short term funding options.
Our annual Temasek Review, international credit ratings and Temasek Bonds are more than just public markers of our credit quality. They expand our stakeholder engagement to include the Singapore public and international investors, and help foster financial discipline over the long term.
On the community front, Temasek dedicated two endowments, of S$35 million each, to honour the late Dr Balaji Sadasivan and Dr Ee Peng Liang. These support training and capability building in healthcare and social services respectively, and were funded from a portion of our excess returns above our risk-adjusted hurdles in previous years.
The non-profit philanthropic organisations supported through our community endowments via Temasek Trust further extend our stakeholder base.
Preparing for Volatility Ahead
The global contagion risks from Europe over the next 12–24 months are not insignificant. Other medium term risks include a tepid recovery in the USA and its substantial debt burden as well as structural challenges in Asia. These may trim the growth potential of Asia, and heighten volatility in this decade. Growth in general will be more tentative.
The steroids of liquidity in Europe, the USA and elsewhere in recent years have provided symptomatic relief for the years of profligacy and overspending. These bought time for serious reforms to be effected, failing which the systemic risks will continue to snowball.
In the near term, inflationary pressures are expected to be low to moderate due to overcapacity, except in growth markets where inflation is anticipated to be structurally higher. Over the longer term, there are significant risks of inflation arising from the expansionary policy responses in the major economies.
Overall, our investment themes remain relevant:
- Transforming Economies
- Growing Middle Income Populations
- Deepening Comparative Advantages
- Emerging Champions
Long term growth potential in Asia remains healthy, despite risks along the way. Sectorally, we began shading our preferences over the last two years towards technology, energy and resources as well as consumer and other middle income needs.
Strengthening the Institution for the Future
During the year, we reviewed and updated our Temasek Charter to distil our roles as an active investor and shareholder, a forward looking institution and a trusted steward.
Temasek was built through the strength of character and commitment of generations of Board and management since 1974. Our core assets have been our people, passion and purpose to build a Temasek for our future generations.
We strengthened our bench to include several well respected industry leaders, while key Temasek stalwarts have moved to Temasek-linked platforms to help extend our capacity and reach in the different markets. We bade farewell to other colleagues, some of whom were selected by the boards of operating companies for CEO and other leadership roles.
Younger colleagues at all levels add to our verve and vitality as an institution, as we continue to nurture them as leaders.
Apart from renewing and expanding our team, we continue to build our systems and capabilities for the future.
Over the last two years, we have been developing a long term expected returns model relevant to Temasek as an owner investor. Built bottom up from our assessment of the longer term global outlook, the model simulates the range and likelihood of returns expected over a 20 year horizon. Further development of the model will continue as we add capabilities to analyse the effects of changes in our portfolio character and mix, and sensitivities to shifts in economic conditions.
We continue to refine our simulation tools for investment risk evaluation, while new tools such as T-Mint have been developed to track macro signals and lead indicators, as we prepare for a more volatile decade ahead.
Recognising Friends and Fellow Board Members
Changes to our Board included the retirement of Simon Israel and Hsieh Fu Hua last year from both their Board and executive roles. I thank them for their service and appreciate their continued engagement in their personal capacities as Chairmen of SingTel and Fullerton Fund Management Company respectively.
On 31 May 2012, Kwa Chong Seng retired as Deputy Chairman after 15 years on our Board. I am deeply grateful to him for his invaluable insights, and his contributions working closely with management as we transformed and repositioned Temasek for the future. I am very pleased that he continues to play an active role as the Chairman of NOL.
We warmly welcomed two new members to our Board: Cheng Wai Keung and Lim Boon Heng. Wai Keung joined in September last year, bringing a wealth of experience in shipping, property investment and hospitality management. Boon Heng, who joined us in June this year, combines a rare suite of deep personal experience in shipping, union leadership and government.
I sincerely appreciate the board members, management and staff, past and present, of Temasek and our portfolio companies, for their contributions. They helped to build Temasek and our portfolio companies as sustainable institutions and outstanding businesses.
In addition, I extend my personal thanks to past and present members of the Temasek International Panel (TIP), the Temasek Advisory Panel, and TIP emeritus members. They have been most generous in sharing their deep insights and rich experiences in an increasingly connected and complex world.
Finally, I thank all our stakeholders – our shareholder, bondholders, business partners, advisors, investors, regulators, philanthropic organisations, friends, vendors and the broader public. Their trust in us through the years gave us the courage and encouragement to create and extend pathways. It is for them and our future generations that we do things today as an investor, as an institution and as a steward, always with tomorrow in mind.
S DHANABALAN
Chairman
July 2012