T-GEM Simulations

Our T-GEM, or Temasek Geometric Expected Return Model, enables us to methodically simulate the range of possible returns for our portfolio over 20 years. These simulations are not predictive of actual outcomes.

As the Temasek portfolio consists predominantly of equities, the T-GEM modelling approach seeks to reflect the volatile nature of equities. The chart below shows that historically, equity returns were volatile, even over long periods.

Economic Scenario-Based Approach

As equity returns are volatile over time, and influenced by macroeconomic or geopolitical events, T-GEM uses a scenario-based approach to simulate our 20-year long term expected returns. This approach takes into account our views of long term macroeconomic fundamentals over the next 20 years, adjusted for current market valuations.

Projection Based on Economic Fundamentals

In projecting economic fundamentals, we make more granular year-to-year assumptions for the first five years, and transit to more general assumptions based on longer term fundamentals as we go beyond 10 years. This “pathing” approach incorporates assumptions about changes in economic conditions over time. We do not assume an equilibrium return that remains unchanged over the 20-year period, nor do we assume a reversion to the historical mean.

Economic Scenario Pathing (Illustrative)

Economic Scenario Pathing

Potential Scenarios for 2017 and Beyond

Potential Scenarios Description
Central Our baseline expectations of growth, reflecting our views of the most likely economic pathway.
China Credit A sharper than anticipated slowdown in growth, as reforms prove too slow to rebalance the economy and address corporate debt-related vulnerabilities. This is a less likely alternate scenario.
Global Trade War Significant increase in trade conflicts amongst major economies, with substantial escalation in barriers to global trade such as tariffs and retaliatory measures. This is a less likely alternate scenario.
Eurozone Breakup Member state(s) vote to leave the European Union, triggering the breakup of the Eurozone. This is a less likely alternate scenario.

T-GEM 20-Year Simulations for Different Portfolio Mix

The charts below show the simulated returns for a Global Bond Portfolio, a Global Equity Portfolio and the Temasek Portfolio. The simulations are based on our Central Scenario.

The Global Bond Portfolio has the lowest upside potential, as compared to the Global Equity and Temasek Portfolios. It also has the least volatility, as shown by its narrower year-to-year annual returns distribution curve.

The Temasek Portfolio has the highest upside potential (see blue shaded) at the end of the 20-year period, but also the highest volatility.

Likelihood of Geometric Returns (Compounded Annualised) by Portfolio Mix,
at the End of 20-Year Period

Likelihood of Year-to-Year Annual Returns by Portfolio Mix, During 20-Year Period

Temasek’s 20-Year Expected Returns for Various Potential Scenarios

The T-GEM 20-year returns curves for the Temasek Portfolio are shown below for the Central, China Credit, Global Trade War, and Eurozone Breakup Scenarios.

Compared to our Central Scenario, our expected returns over 20 years would be lower in the three alternate scenarios of China Credit, Global Trade War, and Eurozone Breakup.

We expect slightly greater volatility in year-to-year returns for a China Credit Scenario, than for our Central Scenario.

Likelihood of Geometric Returns (Compounded Annualised) by Potential Scenario,
at the End of 20-Year Period

Likelihood of Year-to-Year Annual Returns by Potential Scenario, During 20-Year Period