Ensuring the long-term sustainability of its portfolio was the key message from this year’s Temasek Review as it announced an underwhelming 1.83% y-o-y gain in its net portfolio value (NPV).
“In an era of unprecedented global challenges, the resilience of our portfolio remains our core strength,” says Dilhan Pillay, Temasek Holdings’ executive director and CEO, in the annual report released July 9.
“To adapt to a changing world, we’ve been actively reshaping our portfolio,” adds Connie Chan, Temasek’s head of financial services, at the July 9 briefing.
For the FY2024 ended March 31, Temasek reported an NPV of $389 billion, $7 billion higher or 1.83% up on a y-o-y basis, but below FY2022’s $403 billion, a 10-year high.
After adjusting for its unlisted portfolio’s mark-to-market (MTM) value, Temasek’s NPV would be at $420 billion, or a $31 billion uplift. The figure is also $9 billion higher, or 2.19% up y-o-y. The increase in the group’s investment returns in the US and India was offset by the underperformance of China’s capital markets.
The reporting of Temasek’s unlisted assets at MTM value only came from FY2022, when the group’s unlisted portfolio gradually increased. This year, Temasek’s unlisted portfolio stood at 52% (or $202 billion), down from FY2023’s 53%, but a significant change from its weightage of 20% in 2004.
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There is no hard and fast rule for the ideal portfolio allocation to private equity or unlisted assets. Usually, the portion is between 20% and 30%, as private equity can be volatile due to its illiquidity. Over the decade, Temasek’s unlisted assets generated returns of 9% per annum (p.a.), outperforming its overall portfolio, which generated returns of 6%.
“While we have reported our unlisted portfolio on a book value less impairment basis, moving forward, reporting our portfolio value on a mark to market basis would be more in line with our peers,” says Png Chin Yee, chief financial officer of Temasek.
During the year, the group made a net profit of $5.4 billion, swinging back from its $7.3 billion loss in FY2023. Group net profit, excluding unrealised MTM gains or losses of investments in which it holds less than 20% (sub-20%), stood at $8.8 billion, 40.1% down — or $5.9 billion lower — on a y-o-y basis.
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In FY2024, Temasek’s one-year total shareholder return (TSR) was 1.60%, up from last year’s negative TSR of 5.07%.
Its 20-year TSR fell to 7% from 9% due to the exclusion of its post-SARS recovery year of 2004. Temasek explains that TSRs for the longer term depend on the starting year and ending year. Its 10-year TSR, on the other hand, remained stable at 6%.
“The 10-, 20-year return is our main focus. It is for the type of capital that we have. It is well-suited for us to take [a] long-term view and invest with that in mind. We are not a day trader [or] investor,” says Chia Song Hwee, deputy CEO of Temasek International.
“The other part that is important to us is building a resilient portfolio that can withstand market dislocations, which, over the years, we have demonstrated the resiliency of our portfolio,” he adds. “During the bull market, we may not be at the top in performance, but hopefully, at the low of the market, our portfolio will be able to withstand [the swings] better.”
The much-anticipated higher interest rates surprisingly caught the group off guard.“We never anticipated that interest rates would be hiked up so quickly, globally… But we believe that where some parts of our portfolio got impacted, other parts of our portfolio also benefitted… What is important is the underlying assets [and] whether or not the performance can continue,” says Chia.
“Discipline remains an important thing for us to watch when there’s a lot of capital coming into any area,” he adds. “One needs to be watchful. So, it can be the artificial intelligence hype. It can be data centres, or it could even be private credit, which has recently been very hot as well. We have to have the discipline to value the opportunity and take the appropriate risk measures when we invest or not.”
Expanding investments
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Excluding Singapore, the US continued to be the leading destination for Temasek’s capital, followed by India and Europe. The group also increased its investments in Japan.
“In some ways, we’re still underweight in those markets [New York and London, where Temasek opened its offices in 2014]. So we expect the [investing trend] to continue,” says Png. “We would want to… continue investing in India and the US. We do see opportunities across different spaces.”
For Png, the US is a “very deep market” with “a lot of innovation”, which is a “good place” for Temasek’s capital to be in. She adds that despite the high valuations of the magnificent seven stocks, including Apple, Microsoft, Alphabet and Nvidia, valuations are still “reasonable” in certain sectors if investors look at the S&P 500 Equal Weight Index.
India, which has a “large and growing domestic market”, is another country Temasek hopes to tap into, with the group seeing more opportunities in its consumer healthcare and financial services sectors.
Even though the Indian stock market has scaled new heights, Png still sees opportunities within the financial and banking space, where valuations are still “reasonable”.
“We’ve historically had a very strong financial services portfolio in India, so we’ll continue to build on that, as well as look at healthcare and consumer,” she says, adding that the group had already invested around $3 billion in India’s Manipal Hospitals.
“I think these are deep markets, which afford us the compelling sort of risk rewards for the moment, so we’ll continue to invest in those markets,” she continues.
Europe and Southeast Asia are two other regions that the group remains positive on. Europe’s green transition and “leading global companies” are opportunities that the group sees, while it likes Southeast Asia’s “resilient domestic demand”. The latter, which is seeing an upturn in the global manufacturing cycle and a recovery in tourism, are also positives to Temasek’s near-term outlook. Meanwhile, the group remains “constructive” on Southeast Asia in the medium term, with supply chain diversification and structural reforms.
The group is also looking to increase its exposure to Japan, making up about 1% of Temasek’s portfolio “from almost nothing” just a few years ago.
“We see that Japan [will] continue to benefit out of the… structural and cyclical tailwinds. There have been a lot of corporate governance reforms in Japan. Over the last couple of years, we’ve seen a pickup in private equity activities in Japan. And these are some of the funds that we are investors with. So our idea is to invest alongside them,” says Alpin Mehta, head of Temasek’s real estate portfolio and deputy head of its private equity fund investments.
“It’s still early days for us in Japan… But if you look at some of our portfolio companies, we have some exposure to Japan. We have real estate companies like CapitaLand and Mapletree Investments; they’ve also been in Japan for a while now,” he adds.
‘Cautious approach’
For the first time since 2014, Temasek’s exposure to the Americas by underlying assets surpassed China’s. The last time this happened was in 2004 and 2005. As of March 31, Singapore made up 27% of the group’s total underlying assets, down from 28%, while the Americas came in at 22%, up from 21% in FY2023. China fell to third place in terms of underlying asset exposure at 19% this year, down from second place at 22% last year.
In its statement, Temasek says it will continue to take a “cautious approach” to China as it continues to monitor its government policies in 2024.
“There are some structural challenges that still need to be resolved,” says Chia, noting the Chinese government’s “pro-growth” policy decisions and encouraging foreign investors to continue investing in the country.
“Much of the work so far has been on the supply side. Now they’re beginning to work on the demand side and we need to see a little bit more progress on that front before we invest much faster,” he adds. “So we’re watchful, but we remain invested in China.”
Within the country, Temasek is interested in companies such as those in the biotech sector, import substitution, robotics and the electrification and electric vehicle (EV) value chain.
“Now, while some of these businesses have export potential, given the geopolitical risks, we are focusing on companies that only solely rely on the domestic market and [are] less reliant on exporting to other countries,” he says.
Growth sectors
In FY2024, Temasek divested $7 billion net, its first since FY2019, contrasting with a $4 billion net investment the previous year. The year saw $33 billion in divestments, including Singapore Airlines C6L ’ $10 billion redemption of mandatory convertible bonds (MCBs) and Pavilion Energy’s preferential shares.
Meanwhile, the group invested $26 billion into technology, financial services, sustainability, consumer and healthcare sectors. According to Temasek, these sectors are aligned to structural trends — digitisation, sustainable living, the future of consumption and longer lifespans — which have been identified since 2016. The group has increased its exposure to investments in such trends, growing from 13% — or $242 billion — as of the end of March in 2016 to 39% — or $389 billion — as of the end of March this year.
At the same period, transportation, industrials and financial sectors remained the top two sectors within the group’s overall portfolio.
Amid the recent calls to revive the Singapore Exchange S68 (SGX), Chan stressed that Temasek’s mandate is to generate long-term sustainable returns, which is its “key primary focus”.
Where a company ultimately decides to list is a “multi-factor decision”, which is up to the companies to decide.
Moreover, Chan adds that it is “not [Temasek’s] primary concern” regarding companies wanting to list on the SGX. “We also have 65 Equity Partners, [which] looks to invest in companies that want to list on the SGX. Therefore, that’s not our primary concern.”
On its companies going from private to public, Chan says the group will still hold their stakes in these companies should they decide to go public, especially if they see potential appreciation happening when they list.
