Thursday, February 12, 2009

Temasek's Performance - A Dismal Failure of Singapore's Elitism

Government officials and Temasek executives have repeatedly held the line that Temasek's portfolio performance should be evaluated, not simply the performance of individual investments. It is thus no surprise that Temasek's latest unveiling of its recent portfolio performance has come under intense scrutiny, not just by Singaporeans, but by financial analysts all over the world.

This morning, the press reported a 31% drop in the market value of Temasek's portfolio from March 08 to Nov 08. Under rigorous enquiry about the performance of Temasek, government officials retorted that Temasek's performance has been 'respectable' compared to the performance of global investment indices, such as that of the MSCI world index.

Indeed, Temasek may have a case that its performance, relative to world indices, is respectable. The MSCI world index has crashed a whopping 40% since March 08. However, it is extremely unfortunate that Temasek, which prides itself on offering scholarships to Singapore's 'best and brightest', and hiring top foreign talent, is benchmarking its performance to the average performance of the rest of the world. Temasek's only defence is that it is 'above average.'

Temasek's executives and Singapore's politicians, instead, should be benchmarking Temasek's performance to the best and brightest in the world. If indeed Temasek has top talent, its performance should be comparable to the top fund managers. But the truth is, Temasek is no where near the top. In comparison to the best performers, its performance is a dismal failure.

In late 2007, Bloomberg made the following report:
Paulson Housing Bets Make $2.7 Billion

By Anthony Effinger

Nov. 29, 2007 (Bloomberg) -- The subprime crisis that's caused so much trauma for hedge funds and investment banks has brought only good news for John Paulson. He's the manager of more than $7 billion in hedge fund money keyed to mortgage credit.

Paulson started warning his investors back in the middle of 2006 that the frenzy to build and sell housing was a bubble about to pop. His New York-based firm, Paulson & Co., made big bets predicting the edifice would soon come crashing down. The wager paid off in the first nine months of 2007, when Paulson's Credit Opportunities funds rose an average of 340 percent.

That gain earned Paulson an estimated $1.14 billion in performance fees for the nine months ended on Sept. 28. Fees on Paulson's other eight funds bring his total to $2.69 billion, which puts Paulson and co-manager Paolo Pellegrini at the top of Bloomberg's ranking of best-paid hedge fund managers. John Paulson is no relation to Treasury Secretary Henry Paulson, the former chief executive officer of Goldman Sachs Group Inc.

Next on the list is Philip Falcone, whose New York-based Harbinger Capital Partners also bet against the housing boom and collected incentive payouts of $1.3 billion for the same nine months. In third place was Jim Simons, president of Renaissance Technologies LLC in East Setauket, New York.

Indeed, Temasek cannot say that "no one saw it coming." John Paulson and others did - they saw the excessive leverage, lax lending standards, and mispricing of credit risk in the markets - and took bets against the credit markets that paid off handsomely.

The following statement was by hedge fund manager John Paulson, in his statement to the US House of Representatives in November 2008:
"In 2005, our firm became very concerned about weak credit underwriting standards, excessive leverage among financial institutions and a fundamental mis-pricing of credit risk. To protect our investors against the risk in the financial markets, we purchased protection through credit default swaps on debt securities we thought would decline in value due to weak credit underwriting. As credit spreads widened and the value of these securities fell, we realized substantial gains for our investors."

The best and the brightest brains saw the credit crunch coming, and Temasek did not. Indeed, not only did Temasek not see the crunch coming, it went long the credit markets in 2008 - by making massive bets on financials like Merrill Lynch and Barclays. As a result, it made massive losses as the banks further imploded.

Well, even if Temasek didn't short the credit markets, it could have at least avoided making the stupid investments in the investment banks, just as Warren Buffett sat on the sidelines. But instead of just doing nothing, Ho Ching and company just had to get their hands itchy.

Meanwhile, the best and the brightest continued to do what they did best - and make money. To add on to the $1b+ in fees he earned in 2007, John Paulson continued his winning streak in 2008, by continuing to bet against the credit markets and financial institutions - bets that were directly opposite to Temasek's:
John Paulson’s Funds Shine in the Gloom

While his counterparts at other big hedge funds are trying to figure out whether they can stay in business, the fund manager John Paulson continues to rack up enormous profits. DealBook has obtained Mr. Paulson’s confidential year-end letter to his undoubtedly gleeful investors.

The 20-page report details how Mr. Paulson’s firm, Paulson & Company, which manages nearly $29 billion in assets, avoided the huge losses plaguing other funds, and it gives his firm’s outlook for this year.

Paulson Advantage Plus, the firm’s largest fund with roughly $7 billion in assets, returned a whopping 37.6 percent net of fees for 2008. Another version of the fund, which does not use borrowed money to amplify its return, recorded gains of about 24 percent, according to the letter.

Most of the profit in the Advantage group of funds came from betting against a number of financial institutions. At the beginning of 2008, the Paulson firm sold short several large financial stocks including Fannie Mae and Freddie Mac, correctly predicting that they would either become insolvent or need to raise additional capital that would significantly dilute shareholders.

On the downside, the Paulson firm said its long portfolio focused on sectors that generally do better during a recession, including health care, utilities and consumer staples. But nearly every one of those positions declined in value, although less than the overall stock market.

Mr. Paulson is still bearish on the economy going into 2009 and remains short financial stocks and slightly short of the equity markets in general.

“As the credit crisis has spread beyond subprime, all credit categories are experiencing higher losses, threatening the solvency of many additional financial institutions,” Mr. Paulson said in the letter. “The problem with many banks is that they don’t have enough tangible common equity to absorb anticipated losses.”

Temasek really has no excuse. It pays millions in compensation to its management every year. It is supposed to be staffed by the smartest investment minds out there. But its performance during this credit crisis has been, quite simply, mediocre. If we compare the 2008 31% loss in Temasek's portfolio to Paulson's whopping 37.6% gain - thats a net difference of 68.6%. Temasek has underperformed what should be its benchmark by a whopping margin!

Indeed, what we have isn't a bunch of particularly smart people at Temasek - what we have is a bunch of people suffering the curse of group think, of people mindlessly following the advice of their stock analysts - unable to truly see what is happening. What has happened with Temasek's investments should make clear to Singaporeans that there is really no such thing as the "elite" as defined by Singapore's "top brass" - they're just ordinary, mediocre investors - like you and me.

And the sooner Singaporeans realise that, the better. If we did, we would have had a decent chance of avoiding the disastrous capital destroying investments in Shin Corp, Merrill, Barclays and ABC learning. And we'd be billions of dollars more well off as a nation, than we are today.

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