Business Times of 30 August 2006

By JOSEPH CHONG

CAN we all retire by 2015? The recent disclosure of GIC's investment performance in managing Singapore's foreign reserves made headlines in the local media. It was reported that since inception in 1981, the portfolio has delivered annualised returns of 9.5 per cent on a US dollar basis or 8.2 per cent expressed in the local currency.

It was stated that this was better than benchmarks set, though what these benchmarks are was not disclosed. And that got me thinking.

The Lehman's Aggregate Bond Index - a fixed-income benchmark often used by fund managers - only goes back to 1990. We therefore used the Vanguard Total Bond Market Index Fund - which is supposed to mimic the Lehman's Aggregate Bond Index - as a proxy.

This index fund delivered an annualised return of 6.9 per cent in US dollar terms since inception in December 1986. Meanwhile, the MSCI World Index has delivered an annualised return of 8.9 per cent since May 1981 and 6.9 per cent since December 1986 in US dollar terms.

An indexed balanced portfolio of 55 per cent global equities and 45 per cent global bonds would therefore have returned circa 6.9 per cent annually since 1986 or about 8 per cent if one assumes that fixed-income returns are extrapolated back to 1981.

Assuming the reported GIC returns are net - after management costs - we have therefore done very well indeed.

The other point that intrigued us is the market value of Singapore's reserves - which unfortunately was not disclosed. According to the Monetary Authority of Singapore's Website, at June 2006 this was about $201 billion, stated at book value but translated at the prevailing exchange rates.

However, based on the disclosed returns and the reported initial investment sum of $10 billion, and assuming that $201 billion is indeed the current market value, things did not add up when I ran the numbers.

This is because the calculations showed that additions to the reserves would have amounted to an average of only $1.7 billion per annum from 1982. From the data illustrated by the accompanying chart, our current account balance and our increase in foreign reserves was many times this - on average $14.8 billion and $7.54 billion a year respectively from 1982. Indeed, $201 billion would be approximately the uncompounded sum of the annual additions to the official foreign reserves. Compounding at 8.2 per cent the annual additions to the official foreign reserves, we arrived at a market value of $468 billion.

Singapore appears to be a very good example of the eighth wonder of the world (the heart of all wealth management) - compounding of returns.

These are fascinating large sums, especially given the rate at which they appear to be compounding. Indeed, they are so large that they are like the distances between stars - too large for the mind to grasp.

First, what does $468 billion mean?

• It is more than $450,000 per household in Singapore.
• It is more than $133,000 per citizen.

Second, what does 8.2 per cent per annum on $468 billion mean?

• It translates into returns of more than $38,000 per household per annum or about 80 per cent of the median household income in Singapore.
• It translates into an annual return of more than $38 billion or about 19 per cent of GDP.
• It is more than the Progress Package, the state's annual expenditure on health care, education and defence combined - with plenty of change left over.
• It is about five times the annual GDP of Cambodia.

On a more serious note, the implications are profound. The returns on our reserves now appear to be the single biggest segment of our economy.

It is not only the wealth generated but the security it provides. As the returns are many times our annual defence budget, there is no question that we do not have the financial means to defend ourselves. History has shown that wars are won not on the battlefield but by the resources of the national treasury. I therefore could not agree more that it is critical that we get the best people in the world to manage our reserves.

If our foreign reserves continue to grow at this pace, they will exceed $1,000 billion - about $1 million per household - by 2015. Thus, from a financial planning perspective, Singaporeans may be able to 'retire' in 2015. And that would be a global first indeed.

The author is CEO of financial adviser New Independent. He welcomes feedback at josephchong@ni.com.sg This article is for information only. Readers should seek independent advice before making any investment decisions.