THE Government of Singapore Investment Corporation's (GIC) long-term horizon gives it an edge over other investors, it said in its latest annual report.
Taking the longer-term view enables GIC to harvest returns from riskier assets and enables the fund to take a contrarian stance when markets are at extremes, it added.
However, it must be prepared to endure short-term losses or underperformance compared with market indexes sometimes.
GIC group president Lim Siong Guan said: "This year, our report offers specific insights into GIC's investment considerations."
The report includes two articles which explain how GIC invests with a long-term horizon, and how it selects external public market fund managers.
Riskier asset classes should deliver better returns in the long term to reward investors for bearing more risk. The extra return is the asset's risk premium, said GIC. It added: "It takes patience to harvest risk premiums because the extra returns accumulate slowly and unpredictably over time, but GIC's long-term investment approach allows us to do so."
One example was its decision to raise its exposure to emerging market equities in 2003.
Since 2003, GIC's exposure to the more risky sector has reached 15 per cent of its portfolio with a concentration in emerging Asia.
This has paid off. Since 2000, emerging market Asian equities have returned 127 per cent while developed market stocks returned only 22 per cent in that time.
Being a long-term investor also offers GIC the flexibility to take positions against the crowd when markets deviate significantly from fair value, it said.
GIC is able to stomach short-term underperformance against its expectations in return for longer-term gain. This is because its performance is assessed over the long term and the portfolio does not face regular large withdrawals. It added: "GIC buys assets when their prices are below intrinsic value and sells them when they are expensive."
GIC also explained how it chooses and handles its external public market fund managers to whom it gives investment mandates. It noted that such managers have played a significant role, handling up to 20 per cent of the portfolio at times.
This approach "diversifies the Government's portfolio, expands the investment opportunities available and deepens our understanding of financial markets".
A total of 58 per cent of its external managers are based in North America, with 22 per cent in Europe, 11 per cent in Singapore and the remaining 9 per cent in Australasia. GIC said it uses a four-step process, involving strategy research and manager sourcing, manager review and due diligence, portfolio construction, and portfolio monitoring and risk management, to oversee its externally managed portfolio.
"We look for external managers who can maximise a portfolio's total market value over market cycles while controlling the interim risks," it added.