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What We Can Study From Temasek’s 2022 Funding Portfolio

In a yr the place most main markets have gone into bear territory, Temasek shocked on the upside with their internet portfolio worth hitting a report excessive of $403 billion, damaged down right into a one-year funding efficiency of 5.81% (or an annualised 14% compounded since its inception in 1974).

Supply: Temasek Evaluation 2022

I had the privilege of being invited to their 2022 Temasek Evaluation, the place they shared extra insights that weren’t lined within the press launch. Listed below are some key messages that stood out for me:

A diversified portfolio primarily based on intrinsic worth picks

Temasek’s funding self-discipline is centred round intrinsic worth vs. a risk-return framework. In different phrases, the thesis for each funding must level to a transparent intrinsic worth and future development, which is then measured towards the corresponding risk-adjusted value of capital. Increased threat sectors or markets naturally get assigned increased prices of capital.

There are over 400 corporations within the portfolio, so the above doesn’t seize the total image; as an alternative, it’s a consolidation I’ve achieved of the corporations that characteristic as prime investments on their public web site right here.

How did Temasek obtain constructive returns in a yr the place most market indices are destructive?

Apart from a disciplined funding mandate, the clues may be present in how Temasek’s publicity and portfolio allocation is being managed:

You’ll discover that the portfolio is pretty diversified throughout completely different geographies and sectors. Therefore, whereas there are some positions within the purple e.g. Roblox, Temasek was largely spared from the latest meltdown in development / tech / US shares.

The elevated publicity to Singapore comes from a mixture of 2 components: (i) valuation multiples in Singapore didn’t compress as a lot as China / US (ii) Temasek additionally invested $6.2 billion in SIA and took half within the rights points for Olam and Sembcorp Marine.

Temasek additionally continued to gather sizeable dividends i.e. $9 billion in whole.

What does Temasek have a look at earlier than deciding to take a position?

By now, I’m fairly positive most of you might be intrigued on their funding course of, like I’m. So I took the possibility to ask them extra about their thought course of behind each funding choice, and listed here are a number of the concerns shared:

1. There’s a detailed thesis for each funding

The Temasek of us shared about their in depth due diligence previous to investing, in addition to actively monitoring and fascinating stakeholders even post-investment. Internally, that is all consolidated in an funding slide deck that the remainder can even evaluation.

Notably, every thesis additionally lays out frameworks and situations guiding their entry and exit from the funding. Whereas at finest an estimate, however there’s at the very least an approximate holding interval set out for every to information their decision-making.

2. Intrinsic worth and threat components are vital

A beautiful development story isn’t sufficient to make Temasek act on the funding; as an alternative, there must be a transparent intrinsic worth as nicely. That is then weighed towards threat components and value of capital earlier than Temasek decides if the funding will likely be worthwhile.

What’s extra, relying on the dimensions and nature of the funding, both quarterly or month-to-month opinions are carried out to measure towards the unique thesis.

3. Administration high quality is essential

Administration high quality is without doubt one of the prime issues that Temasek seems at, because the capabilities of the leaders working the enterprise matter. Throughout COVID-19, this was tougher to evaluate because the Temasek workforce was unable to fly abroad and meet with the managers in individual, however this has since lifted as enterprise travels have resumed.

Divest as soon as the funding thesis has performed out

Temasek’s Director of Public Affairs, Paul Ewing-Chow, mentioned one thing that I felt was price repeating.

“We’re mid to long-term buyers, and never everlasting buyers.”

Not like some buyers who maintain on to their positions for an indefinite period of time, Temasek sees no qualms in divesting when the thesis has performed out, or when there are extra compelling alternatives for them to re-allocate capital to.

This may assist to elucidate why Temasek offered Nio (and at an impeccable timing too, earlier than Nio’s inventory worth began crashing) proper earlier than the correction.

Threat administration in a globally unsure world

Whereas Temasek believes that development will proceed to sluggish whereas inflation stays elevated, they are going to proceed to take a position – albeit at a slower tempo because it expects extra market declines.

Whereas its previous one-year and historic returns look good, let’s not neglect that even Temasek isn’t proof against durations of great drawdowns as nicely.

However extra importantly, Temasek’s funding posture is to journey out brief time period market volatility and deal with producing sustainable returns over the long run. Whereas Temasek is open about the way it expects its portfolio to have increased year-to-year volatility of annual returns (with increased dangers of destructive returns in anybody yr), the aim continues to be targeted on long-term returns.

In a interval of sustained market volatility and an unsure future (recession? persistent inflation? stagflation? rising rates of interest for longer?), particular person buyers will do nicely to recollect this.

With love,
Price range Babe



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