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What We Can Be taught From Temasek’s 2022 Funding Portfolio


In a 12 months the place most main markets have gone into bear territory, Temasek stunned on the upside with their web portfolio worth hitting a document 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 Overview 2022

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

A diversified portfolio based mostly 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 price of capital. Greater danger sectors or markets naturally get assigned larger prices of capital.

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

How did Temasek obtain optimistic returns in a 12 months the place most market indices are detrimental?

Except for a disciplined funding mandate, the clues might 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 crimson 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 elements: (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 complete.

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

By now, I’m fairly certain 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 determination, and listed below are among the issues 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 remaining can even assessment.

Notably, every thesis additionally lays out frameworks and eventualities guiding their entry and exit from the funding. Whereas at finest an estimate, however there may be not less than an approximate holding interval set out for every to information their decision-making.

2. Intrinsic worth and danger elements are essential

A lovely development story just isn’t sufficient to make Temasek act on the funding; as a substitute, there must be a transparent intrinsic worth as properly. That is then weighed towards danger elements and value of capital earlier than Temasek decides if the funding will probably 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 to be 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 particular person, 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 traders, and never everlasting traders.”

Not like some traders 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 would possibly assist to clarify 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 may 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 overlook that even Temasek just isn’t resistant to intervals of serious drawdowns as properly.

However extra importantly, Temasek’s funding posture is to journey out quick time period market volatility and give attention to producing sustainable returns over the long run. Whereas Temasek is open about the way it expects its portfolio to have larger year-to-year volatility of annual returns (with larger dangers of detrimental returns in anyone 12 months), the objective remains to be centered 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 traders will do properly to recollect this.

With love,
Funds Babe



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