What Lessons Can Singapore Investors Learn from Temasek’s $24b Drop in Net Portfolio Value?

No one likes a bad reputation, and often they react to controversy in unexpected and sometimes extreme ways. After NUS became known (again!) for extremely inexcusable behaviour at orientation camps, the institution responded by cancelling all student-organised freshman activities. After Donald Trump has been repeatedly laughed at since 2011 for suggesting he wants to run for President of the United States … well, the less said about him, the better.

In fact, the only time you want to be known for being bad is if you’re DC Comics’ Suicide Squad – a bunch of super-powered criminals turned black ops team – making its big screen debut this week. You’re welcome for the extra publicity, Warner Bros.

Last month, Temasek Holdings had to deal with the unfortunate news that its net portfolio value, as of 31 March this year, fell by $24 billion. And then, controversially, it went on to announce a possible $1.18 billion buyout deal for SMRT, the troubled transport firm that’s been the butt of one too many of our jokes. But there is method to the madness, and Singapore investors can definitely learn a couple of things from Temasek.

 

Temasek is a big investment firm in an ivory tower – how can we small-fry investors learn anything from them?

Actually, many investment strategies don’t rely on whether you’re dealing with billions or thousands of dollars. At the end of the day, the goal of any investment is to grow your portfolio value, and Temasek knows a thing or two about that.

Over the past decade, Temasek has generally seen a steady growth of their net portfolio value. In fact, they’ve almost doubled their portfolio value since 2006. The only exception to their growth before this year’s result? A significant drop in net portfolio value from $185 billion to $130 billion back in 2009. That, of course, came after an especially difficult year for the global market – and that’s just me refusing to call it the “global financial crisis”.

In fact, one could say that last year, when Temasek’s net portfolio value jumped to $266 billion, was the exception to their steady growth. Looking at it another way, Temasek has actually increased their net portfolio value from $223 billion in 2014 to $242 billion in 2016.

 

What can Temasek’s long-term investment strategy teach us?

The commonly-held wisdom when it comes to investing is that high risks bring high returns. An investment strategy that involves dynamic gains may seem like the best way to make a quick buck, but it’s also quite often the easiest way to lose your capital as well. While some risk appetites might be willing to gamble on those high stakes, and earn big as a result, for many of us the danger of losing a significant amount of money can be more than we bargained for.

This is especially true when markets are as volatile as they are now. When global economies are unpredictable, and will continue to be unstable in the near future, the key to smart investments is to ensure that you have a long-term goal that can weather the ups and downs.

With that in mind, here are 3 things we can learn from Temasek’s investment ethic.

 

1. Long-term doesn’t mean holding on to the same investments forever

Though it might seem counter-intuitive to the casual investor, most investments aren’t a matter of buying stocks in a single company and then hoping the value grows over the next 3 to 4 decades without any input from you. Even the hardiest of cactus house plants still require some level of care and tending, what more an investment product.

When it comes to building a portfolio, this means being constantly ready to sell off investments that won’t do as well in the years to come, in favour of investments that are more forward-looking. And while this strategy may seem like common sense, it’s actually surprising just how difficult it is to let go of a stock.

Ask any investor and they will tell you that when a stock is on the rise, you don’t want to sell in case it gets higher. When a stock isn’t going anywhere, we hold on to hope that it will pick up steam soon. And when a stock crashes and burns, we reassure ourselves that there’s nowhere left for it to go but up.

Temasek on the other hand, makes that difficult decision regularly. Last year, it made the rare decision to divest some $28 billion, the most it’s ever divested in the past decade. In their own words, Temasek took advantage of a “liquidity-driven market rally” in early 2015 to reshape their portfolio. The main rationale behind this was to reduce their reliance on industries which they felt have less of a future, like the semiconductor manufacturing industry for example.

More importantly though, the income from that divestment went straight back into funding new investments, in growing industries such as the financial services and technology sectors.

 

2. Dividends, dividends, dividends

Many investors focus on stock prices when making investment decisions using a variation of the deceptively simple “buy low/sell high” strategy. Smart investors look at other factors as well, with dividends being a key aspect of their strategy.

Dividends represent a form of recurring income from investments, and are often more crucial than the actual value of the investment. This is because the savvy investor often re-invests their dividends in order to build their portfolio at an accelerated rate. While high-yield dividends do come with their own caveat emptors – for example, you probably don’t want to invest in a company that cannibalises operating costs to pay out large amounts in dividends – in general, they are a preferred option for investors.

As a long-term investor, Temasek is no different. For 4 of the past 5 years, they have recorded about $8 billion in dividend income each year, or about 16 to 18 times their interest expense. The dividend income in turn, funds new investments as well.

 

3. Taking ownership of your investments

With Temasek, taking ownership of your investment is a literal reality. It has 100% ownership in companies like MediaCorp, PSA, Singapore Power and is a majority shareholder in Singapore Airlines, SMRT and Singtel.

This, of course, gives it the ability to ensure that the companies are guided by capable boards that bring with them diverse experiences and run by competent leaders in management.

While the regular investor will probably never have the level of shareholder rights that Temasek has, that doesn’t mean that we can’t be active and engaged shareholders in our own way.

Take the time and effort to ensure that the companies you’re investing in have good leaders. Attend shareholders’ meetings where possible and familiarise yourself with the company prospectus. Believe it or not, there’s more to attending these meetings than just free food.

Ultimately, it has to be reiterated that Temasek’s reported drop in net portfolio value in this year’s report should not be the focus. Likewise, if our own investment portfolios take a hit in the short-term, we should not panic. A long-term investment strategy means that you look at performance over time, and on that front, we can learn a thing or two from Temasek.

 

Are you a short-term or long-term investor? What wisdom do you wish you knew when starting your investment journey? We want to hear from you.