Performance & Portfolio

While we adopt a long-term view of our portfolio, we invest across different time horizons. We have the flexibility to take concentrated positions and invest across all stages of the business life cycle, from early-stage to mature, and unlisted to listed assets. We do not have specific targets for investing by asset class, country, sector, or single name.

Our long investment horizon means we have a portfolio of predominantly equities which is expected to deliver higher risk-adjusted returns over the long term. Our stable funding base allows us to invest and benefit from companies with high growth potential through listed and unlisted assets (including private equity funds).

Consequently, given the high equity exposure, our portfolio is expected to have higher volatility of returns, with a greater risk of negative returns in any one year.

Our investment approach is to ride out short-term market volatility and focus on generating sustainable returns over the long term.

Given the expected volatility, we manage our leverage and liquidity prudently for resilience and investment flexibility, even in times of extreme stress.

Our investment posture is coupled with a culture of risk ownership throughout the organisation. Our risk-sharing compensation philosophy puts the institution above the individual, emphasises the long term over the short term, and aligns the interests of our staff with those of our shareholder.

We have no tolerance for risks that could damage the reputation and credibility of Temasek.

Our Organisational Risk Management Framework includes Risk Return Appetite Statements which set out various levels of risks tolerance, from reputational risk to liquidity risk, and risk of sustained loss of overall portfolio value over prolonged periods.

Risk Governance

There are various risk pillars by which we assess risks across a wide spectrum of domains. These risk pillars are supported by specialised teams, comprising members from different functions, which report to senior management for general oversight. 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 and Board Risk & Sustainability Committee.

Investment Risk

All new investment proposals are subject to a due diligence process commensurate with the nature of the investment to be made. This is intended to validate business theses and examine material risks. The exact scope of the required pre-investment analysis will be determined based on the specific risk profile being considered. Pre-investment analysis is done by our deal origination teams whose expertise is supplemented by internal experts or external professionals who perform additional due diligence in specialised areas such as legal, tax, and climate risks.

When we invest in companies, we conduct a bottom-up fundamental valuation analysis and due diligence. We also use an appropriate risk-adjusted cost of capital (RACOC) to determine a best estimate of company valuation. Our analysis enables us to estimate a fair value for the company. We also estimate stress case valuations to help us gauge the degree of variability in potential future returns under different assumptions.

We will compare our reasonable estimate of fair value with current market valuation to determine if an investment makes sense at the proposed price, and if it provides a margin of safety to our RACOC, including an estimated cost of carbon emissions.

The discount rate used in the valuation process will be a weighted average of the company’s cost of debt and equity capital. We utilise the capital asset pricing model to derive an appropriate cost of equity. This takes into account leverage, the type of industry, and the countries of operation. Investments in riskier sectors or markets will have higher costs of capital. We also add an illiquidity risk premium for unlisted investments and a venture risk premium for early-stage investments to account for their respective risks.

We use individual companies’ RACOC to compare the relative attractiveness between investment opportunities. We may dial up or down the required spread over RACOC as a tool to tighten or loosen our investment risk posture.

Depending on the external outlook and our investment stance, we may choose to invest in opportunities with positive expected returns, which are below their respective individual RACOC. We also deploy excess liquidity in short-term liquid investments where the expected returns may be lower than our cost of capital.

All prospective investments must be reviewed and approved by our investment committee.

Investment proposals made to the investment committee are typically submitted by both market and sector teams who provide geographic and industry expertise. Depending on the size or risk significance, these proposals may be escalated to our Board Executive Committee or Board for a final decision.

Post-investment monitoring is performed by the investment teams on a continuous basis, and formally by senior management at quarterly review meetings chaired by the Deputy CEO. They assess if the investment is performing to our expectations and whether any action should be taken.

Foreign Exchange Risk

Our projected risk-adjusted return for each investment proposal takes into account any anticipated foreign exchange (FX) movements against the Singapore dollar.

We also selectively hedge FX exposures from confirmed nearer-term cash flow and expected divestments within our forecast period.

Environmental, Social, and Governance Risk

Our investments are evaluated on the basis of our Environmental, Social, and Governance (ESG) framework, which is integrated within the investment process. This framework requires the analysis of material ESG considerations, with an emphasis on climate-related risks.

As part of our analysis, we apply an internal carbon price of US$65¹⁴ per tonne of carbon dioxide equivalent (tCO₂e)¹⁵. This provides an additional consideration to our assessment of the long-term climate resiliency and our returns expectations for each investment.

We are also strengthening our analytic capabilities to enhance our pre-investment due diligence and post-investment engagements to address material nature-related risks.

We piloted a set of baseline expectations in social areas such as human rights and labour practices; diversity, equity, and inclusion; talent management; product quality and safety; data privacy and security; and supply chain responsibility. To manage and mitigate such risks, we conduct deeper due diligence in cases where potential exposure to social risk is identified.

Our Board Risk & Sustainability Committee (RSC) was established in January 2022 to, amongst other things, enhance the focus on opportunities and risks arising from sustainability trends, including climate change, and other financial, reputational, operational, and cyber risks.

Liquidity & Leverage Risk

We manage our leverage, liquidity, and balance sheet prudently for resilience and flexibility. We maintain a high level of liquidity in our portfolio and manage our liquidity risk by ensuring that our primary recurring sources of cash flows are able to cover our non-discretionary uses of cash, such as operating expenses, taxes, and interest to bondholders.

Our recurring income includes divestments, dividends from portfolio companies, and distributions from funds.

Our liquidity is supported primarily by our recurring income, supplemented by proceeds from any debt issuances via Temasek Bonds and Euro-commercial Paper, as well as bank borrowings. Total leverage is restricted by an overall debt limit set by our Board. The debt limit takes into account our portfolio value, shareholder funds, forecast cash flow, and credit profile. We proactively plan for a well-distributed debt maturity profile, avoiding large refinancing risk in any one year.

In addition to maintaining the discipline of regular divestments to generate liquidity, the construction of our portfolio enables us to access liquidity relatively quickly in times of stress. As at 31 March 2024, our liquid and sub-20% listed assets alone were about five times our debt outstanding. In the highly unlikely extreme scenario where we have no other cash inflows, aside from using our liquidity balance, divesting a small part of our liquid and sub-20% listed assets would be sufficient to cover the total debt outstanding in under two weeks¹⁶.

As a policy, Temasek does not provide any financial guarantees for the obligations of our portfolio companies.

Portfolio Value Risk

We track and manage risks proactively, through economic and market cycles, including specific risks at the asset level.

We assess the sustained impact of multiple risk scenarios on the intrinsic value of our investments. The aggregate of these changes provides an estimate of the portfolio level variation in present value, future cash flows, and income in each scenario.

As illustrated in the diagram below, Fundamental Earnings Impact is our estimate of sustained loss. This is different from Trough Impact, which includes mark to market effects due to short-term increases in risk aversion. In a stress event, our largely equity portfolio will likely be adversely affected by market volatility reflecting increased short-term risk aversion. However, markets typically recover from the trough and normalise after the stress event is over. Over time, we expect our portfolio value to recover towards the previous growth rate, but from a lower starting point.

We do not manage our portfolio to short-term mark to market changes.

Illustration of Fundamental Earnings Impact

• Base Case
• Stress Scenario

Based on our assessments of any likely sustained loss, consistent with our intrinsic value discipline, we may manage the risks as follows:

• Divest, hold, or protect the individual investment impacted;
• Change the portfolio composition for the long run;
• Take actions to protect the portfolio, for example, by entering into tactical single stock, index or rates hedges.

12-months Returns Simulation

While we expect volatility consistent with a largely equities portfolio, we manage our portfolio to deliver sustainable returns over the long term.

For our current portfolio mix, our Monte Carlo simulations based on recent market conditions show a five-in-six chance that one-year forward portfolio returns may range from -10% to +15%. Our annual returns ranged from -30% to +43% over the past 20 years.

Narrower curves in the chart below mean less volatility compared, for instance, to the flatter curves of the 2008/09 Global Financial Crisis (GFC) years. A wider simulated range means a more volatile outlook.

(as at 31 March)

Simulation of 12-month Forward Portfolio Returns

¹ Based on Monte Carlo simulation for 12-month forward portfolio returns distribution, assuming no change in market conditions or portfolio mix.

² Total Shareholder Return.

³ Periods of low market volatility.

⁴ Periods of medium market volatility.

⁵ Periods of high market volatility.

(as at 31 March)

Volatility of Returns (%)

• Simulated returns¹  in a period of low market volatility
• Simulated returns¹  in a period of medium market volatility
• Simulated returns¹  in a period of high market volatility
• Actual Total Shareholder Return a year later

¹ Based on Monte Carlo simulation for 12-month forward portfolio returns distribution, assuming no change in market conditions or portfolio mix.

The range of possible returns from the simulation is dependent on the prevailing volatility and correlation conditions of asset markets. When prevailing volatility is high, such as at the onset of the COVID-19 pandemic or during the GFC years, the wider range of one-year simulated forward returns signals greater probability of larger gains and losses. When volatility is low, as at present, simulated forward returns fall within a narrower range. However, history shows that periods of lower volatility may be followed by sudden dislocations. We therefore complement these estimates based on current conditions with the scenario stress tests process described above.

Operational Risk

We are committed to continuously improving the way we manage business continuity risks. Our contingency management framework ensures business continuity and covers incidents arising from safety, physical security, and other threats. The framework also takes into account the potential impact of emerging risks, such as physical threats and health situations around the world.

We have institutionalised a risk incident reporting process which encourages staff to proactively report gaps, perform root cause analysis, and adopt appropriate remediating measures for all reported risk incidents. This contributes to a work environment with a focus on excellence and helps build a healthy risk management culture in Temasek.

In response to growing physical security threats, we provide regular training to relevant stakeholders to adequately equip them with response techniques for emergency situations. For instance, Evacuation Wardens receive occupational first aid training, while our Business Continuity Planning Coordinators and front-line Emergency Response Team undergo emergency response training. Additionally, we have established multiple communication channels to ensure effective information dissemination. This proactive approach enables us to respond promptly and confidently in times of emergencies.

In addition to the training, we regularly conduct response exercises simulating critical infrastructure failures, and scenario-based tabletop exercises with key stakeholders to ensure that our contingency and disaster recovery plans remain effective, relevant, and adequate. We constantly work on improving our capabilities to ensure that our staff and visitors remain safe, and that critical business functions can resume in a timely manner.

For crisis management, the primary focus typically revolves around strategies and swift decision-making. While these elements are crucial, the mental well-being of our staff is equally paramount. As such, we have integrated our Care Supporters network into our crisis management processes. This significantly enhances our ability to manage crisis response and recovery efforts effectively. To strengthen psychological resilience amongst staff, more than 70% of our staff have been trained and equipped with basic psychological support skills.

Cybersecurity Risk

Given the evolving cybersecurity landscape, we regularly monitor and track cyber risks and continuously enhance our cybersecurity defence and resilience. We continually assess and perform regular testing of our environment to ensure our cybersecurity controls are effective, and are committed to enabling secure deployments of applications and technologies that support business needs. Most recently, we established an Artificial Intelligence (AI) governance framework to enable secure AI deployment across the firm. In addition, we conduct simulation exercises and update our cyber response plans on a regular basis to ensure continued relevance, familiarity, and effectiveness.

We engage our portfolio companies, together with our Temasek Operating System partners, on an ongoing basis to champion cybersecurity best practices and to elevate our respective cyber defence and resilience capabilities. This year, we also introduced a Board-level Cyber Risk Governance Guideline to support board oversight of cyber governance and standards in our portfolio companies.

Our cybersecurity team, supported by expertise from our cybersecurity platform companies, assesses the cybersecurity health of potential investee companies as part of the investment due diligence process. Their assessment is based on four areas: key data assets; regulatory requirements and data privacy; cybersecurity policy and governance; and assessment and incidents. A comprehensive cybersecurity scan on potential investee companies may also be conducted.

Legal & Regulatory Risk

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

Our global footprint, coupled with a fast and ever-evolving legal and regulatory environment and increasing enforcement and oversight by authorities, reinforces the importance of robust transactional processes and compliance programmes. We continue to build expertise across novel and developing areas that we are involved in to ensure that we are able to identify and manage legal, regulatory, and compliance risks appropriately.

Our Legal & Regulatory (L&R) department ensures that policies, processes, and systems are appropriately designed and implemented, consistent with applicable laws and aligned with Board directives to advance the firm’s objectives while managing risks and safeguarding its interest. For example, we have implemented policies and control processes to address financial crime such as bribery and corruption, and sanctions violations; to ensure compliance with foreign direct investment, merger control, and export control regimes; and to manage legal and regulatory risks relating to the trading of derivatives. We continuously monitor regulatory developments to ensure that our policies, procedures, and monitoring systems reflect these changes.

We encourage and facilitate the development of a sound corporate culture that incentivises good staff behaviour. High ethical standards and compliance with applicable laws and regulations are expected in the pursuit of our business interests. Specific attention is directed at governance, incentive systems, and training.

At the core of this is our Temasek Code of Ethics and Conduct (T-Code) and its related policies that guide our Board directors and staff in their daily dealings and conduct. With integrity as the key overarching principle, T-Code policies cover areas such as anti-bribery, whistle-blowing, management of confidential information, and prohibition against insider trading. All staff also undergo mandatory training in anti-bribery and corruption, anti-harassment and discrimination, as well as the prevention of insider trading. Our annual staff bonus plans include T-Code compliance requirements.

Macro and Geopolitical Risk

Over the last decade, besides the ever-changing macroeconomic landscape, we have seen heightened geopolitical tensions arising from events such as war and the pandemic, as well as great power rivalry.

Our views around the global economy help to guide Temasek’s investment stance and our overall deployment pace. We also recognise that there has been a renewed and urgent focus on national security (encompassing economic security and competition), resiliency including energy and commodity sufficiency, data ownership, techno-nationalism in sectors such as biotechnology, and the use of subsidies, to name a few pressing issues. The presumptive gains from the globalisation of trade, investment, and technology are subject to ever-greater scrutiny.

To stay ahead of these developments, our International Policy and Governance teams — located in Beijing, Brussels, Singapore, and Washington, DC — actively monitor geopolitical risks and anticipate policy developments in our key markets that could impact our activities.

Through our engagement with thought leaders and authorities, we exchange views so as to promote better outcomes for all in the design and implementation of policy. In particular, we aim to promote a better understanding of how we operate based on commercial principles, and independent of government interference and support. For example, we had supported the International Monetary Fund initiative to frame the Santiago Principles for sovereign investments back in 2008. We advocate good governance and uphold these principles.