Managing Risk

There are inherent risks whenever we invest, divest, or hold our assets, and wherever we operate.

As an owner, we maintain full flexibility to deploy capital across listed and unlisted assets. We do not have predefined concentration limits or targets for investing, whether by asset class, country, sector, theme or single name. We have the flexibility to take concentrated positions and adopt a long investment horizon. We manage our leverage and liquidity conservatively for resilience and flexibility, even in times of extreme stress.

Our portfolio of mostly equities means higher year-to-year volatility of annual returns, including a higher risk of negative returns in any one year. The higher risk of negative returns in some years comes with an expectation of higher positive returns over the long term. Our long term investment horizon allows us to ride out market volatility and focus on generating sustainable returns.

We promote a culture of risk awareness and balanced risk taking. Our risk sharing compensation philosophy aligns the interests of employees with those of the shareholder, puts the institution above the individual, and emphasises long term over short term. Balanced risk taking applies to both our investments and institutional capabilities.

Our risk management framework covers strategic, performance and operational risks. We track and manage risks proactively and throughout cycles. There are designated risk owners for specific risks at Company or unit levels.

We have the flexibility to take concentrated positions and adopt a long investment horizon.

Risk Categories

Strategic Risks Performance Risks Operational Risks
  • Reputation
  • Aggregate risk profile
  • Funding and liquidity
  • Political
  • Structural foreign exchange
  • Environmental, social and governance
  • Macroeconomic
  • Geography
  • Industry
  • Markets
  • Tax
  • People
  • Legal and regulatory
  • Systems and processes
  • Counterparty
  • Business disruption

To minimise operational risks, we embed risk management in our systems and processes. These include our approval authority delegation, company policies, standard operating procedures and risk reporting to our Board.

We have disciplined processes to consider various perspectives. Investment proposals are submitted under a two-key system, for instance by both market and sector teams, to our investment committee. Depending on the size or risk significance, these proposals may be escalated to our Executive Committee or Board for final decision. Functional teams provide additional specialist perspectives and independent reviews. Risk considerations for individual investments include reputation; business; legal and regulatory; tax; funding; environmental, social and governance; and key management risks.

Country and sector risks are factored into our risk-adjusted cost of capital for each investment. We safeguard our investments by adopting valuation discipline.

Our policy permits only personnel authorised by a board resolution to enter into derivatives transactions within tightly defined scopes and limits.

Our annual staff bonus plans include T-Code compliance requirements.

We comply with all obligations under Singapore laws and regulations, including those arising from international treaties. We also comply with the laws and regulations of jurisdictions where we have investments or operations.

Our global footprint, coupled with increasing regulatory oversight, underscore the importance of robust compliance programmes. Our Legal & Regulatory department (LR) ensures that policies, processes and systems are appropriately designed, consistent with applicable laws, and aligned with Board directives. For instance, our policy on derivative transactions permits only personnel authorised by a board resolution to enter into such transactions within tightly defined scopes and limits on behalf of specific designated entities. LR also provides regular education and training on key policies and processes.

LR monitors regulatory reporting compliance through robust securities tracking systems. Regulatory requirements and monitoring systems are continually reviewed and updated to track changes in laws and regulations.

Our Temasek Code of Ethics and Conduct (T-Code) and its related policies guide our Board directors and staff in their daily dealings and conduct. With integrity as a key overarching principle, T-Code policies cover areas such as anti-bribery, whistle-blowing, management of confidential information and prohibition against insider trading. Our annual staff bonus plans include T-Code compliance requirements.

Business Continuity and Incident Management

Our contingency management framework helps ensure business continuity and manage potential risk incidents arising from safety, security and other threats. We are committed to continually improve the way we manage business continuity risks.

We test our readiness through regular data centre recovery exercises. We have a hot site where staff can continue to operate in the event of emergencies. We exercise our response plans frequently to ensure that they remain effective and adequate.

We care for the safety, security and well-being of our staff and their families during emergencies. As we expand globally, we provide necessary assistance to our staff wherever they operate.

Concentration Profile

Temasek has the flexibility to take large stakes in investments in anticipation of superior returns. Our concentration profile is the result of such investments in aggregate. For the year ended 31 March 2017, our top 10 holdings represent 44% of the total net portfolio value.

Our largest geographic concentration by underlying assets remains in Asia, with 29% and 25% in Singapore and China respectively as at 31 March 2017. The US is third largest at 11%.

Our largest sector concentration as at 31 March 2017 was in the financial services sector, at 25% of the total portfolio, up from 23% a year ago.

Singtel remains our largest single name concentration at 12% of our portfolio in March 2017, down from 18% in March 2007, a decade ago.

Our long term investment horizon allows us to ride out market volatility and focus on generating sustainable returns.

(as at 31 March)

Concentration Profile of S$275b Portfolio

Risk to Short Term Reported Returns

Our mark to market policy aims to reduce the behavioural risk of holding on to poor investments for fear of reporting realised losses. As a result of valuing our listed investments on a mark to market basis, there will be greater volatility in our reported annual results.

In any given year, our net portfolio value may see a once-in-20-years swing of as much as 30-40%. We saw this during the Global Financial Crisis, when our net portfolio value fell 30% in one year, only to rebound 43% the next year.

We use a range of formal market risk metrics to track the forward looking market risks and volatility of our portfolio. These include portfolio Value-at-Risk (VaR), the 12-month forward looking Monte Carlo simulation of the portfolio, and general market risk indicators such as the CBOE Volatility Index (VIX).

Although risk indicators have trended lower since late 2016, a number of key risks remain on the horizon, including concerns over a credit crunch in China, uncertainties around rising trade protectionism, and political risks in Europe. Depending on the outcomes of these events, a quick escalation in risk and a consequent downturn in equity markets is a possible scenario. In addition, long term risks may continue to be masked by central banks’ accommodative policies since the Global Financial Crisis. We remain vigilant and take a proactive approach managing these risks.

Our mark to market policy aims to reduce the behavioural risk of holding on to poor investments for fear of reporting realised losses.

VIX Trend and Temasek's VaR as % of Portfolio Value (March 2005 to March 2017)

Looking to the immediate future, we use Monte Carlo simulation based on past market data to gain a sense of the likelihood of a range of returns at the end of the next 12 months.

Applied to the current Temasek portfolio mix, our Monte Carlo simulation shows a five-in-six chance that our one-year portfolio returns can range from -11% to +14%. This is within the average simulated portfolio returns over the last 10 years of -18% to +31%.

In the chart below, the Monte Carlo simulation curves represent the likelihood of one-year returns for some of the recent financial years. Narrower curves mean less volatility compared to the flatter curves of the 2008/09 Global Financial Crisis years.

Simulation of 12-month Forward Portfolio Returns

(as at 31 March)

Volatility of Returns