GIC in a Risky World

Ashby Monk

Singapore is small, it lacks natural resources, and it sits in a reasonably precarious geopolitical setting that could ultimately be hostile to its independence and economic prosperity. What to do?  To manage the risks to its physical and economic security, the government has built up a large cushion of financial reserves that (it hopes) will reinforce the country’s autonomy and independence in times of crisis. This is where the Government Investment Corporation of Singapore comes into play. Indeed, the political elites specifically see the GIC as a tool for managing the potential adverse consequences of living in an uncertain world. For example, the latest edition of the GIC’s annual report has a clear theme: The future is challenging and uncertain and the GIC stands to minimize and manage these challenges and uncertainties for the benefit of all Singaporeans.

All this is to say that the GIC’s existence and legitimacy is a function of the risks faced by Singapore. So it will not be a surprise to you if the GIC is ahead of the curve when it comes to “risk management” practices. And this fact comes through quite clearly in the fund’s annual report. Indeed, the GIC’s approach to “risk management” has three distinct components: portfolio risk; process risk and people risk. I think you’ll be particularly interested in the latter two (given that portfolio risk is the more standard form of risk management). Here’s a blurb from the report:

“Managing Process Risk: All investment and operations staff are required to identify, evaluate, manage and report risks in their own areas of responsibility, and comply with established risk policies, guidelines, limits and procedures. New investment products or strategies are subject to a risk identification and assessment process conducted by a crossfunctional group. This ensures that risks associated with the new product or activity are identified and analysed prior to the under taking of the new investment. Part of this process is ensuring that the required people and infrastructure such as systems, procedures and controls, are in place to manage these risks…We continuously monitor a set of key risk indicators pertinent to our business, in order to manage risk of loss resulting from possible slippages in GIC’s operations. Indicators such as late transaction processing, late report releases, stale prices and system downtime highlight potential risk areas to be addressed in a timely manner…Throughout the year, internal and external auditors scrutinize all operations and business processes. The deficiencies identified are required to be addressed within agreed time frames and reported to senior management.

Managing People Risk: Consistent with our long-term orientation, GIC’s remuneration policies and practices support and reinforce a culture of prudence in risk-taking, and recognise and reward our people on the basis of sustainable results. We require our staff to observe GIC’s code of ethics, maintain exemplar y conduct, and comply with laws and regulations, including prohibitions against insider trading and other unlawful market conduct. These are among the guidelines set out in our compliance manual maintained by the legal and compliance department. Staff must protect confidential information and handle material non-public information with due care. The manual also states policies relating to the management of conflicts of interest, gifts and entertainment, copyright rules, personal investments and whistle-blowing. We provide regular training to all staff to keep them current with compliance requirements. Staff also receive training on exchange regulations relevant to their responsibilities.”

Clearly, the GIC takes “risk management” to a new level by including “people” and “process” into the more traditional approaches focused on “portfolios”. Why has the GIC gone a step farther than other funds in thinking about risk? I’d wager that the precarity of Singapore’s geographic position (both physical and economic) has engendered a deep-rooted risk management culture in the GIC that colors all of their decisions. After all, the GIC exists to manage risks for the government and the country, so it should be natural to apply this risk logic to their own operations.

Anyway, I think that’s quite interesting. And it offers some additional insights as to why the GIC probably remains quite secretive about certain aspects of its organization. For example, the CIC’s annual report (which came out yesterday) included detailed financial statements; the GIC report had nothing of the sort. Perhaps this too is a sort of ‘geopolitical’ risk management (to prevent neighbors from ‘coveting’ their ever growing pool of resources a bit too much).

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This website is a project of Professor Gordon L. Clark and Dr. Ashby Monk of the School of Geography and the Environment at the University of Oxford. Their research on sovereign wealth funds is funded by the Leverhulme Trust and The Rotman International Centre for Pension Management.

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