Apres Ho Ching, Le Deluge?

Ho Ching, the wife of prime minister Lee Hsien Loong, is departing from stewardship of Temasek Holdings in good time for her successor to have to be the one in charge when the disastrous performance for 2008 and 2009 comes around.

Such are the circumstances that the Singapore leadership has decided that it is best that a foreigner replace her – not that Temasek's earlier recruitment of Wall Street whiz-kids has done it much good. This time former BHP Billiton boss Chip Goodyear just might shift Temasek's attention away from disastrous forays into finance towards the natural resources which are so abundant in Southeast Asia but so conspicuously lacking from its Temasek's portfolio.

BHP is in good shape compared with the other major mining companies such as Rio Tinto and Xstrata. But do not be deceived by this into thinking that Goodyear is the cautious, far-sighted manager needed by a sovereign wealth fund such as Temasek. BHP owes its relatively strong position largely to luck.

Goodyear, a Wharton-bred former investment banker, made his reputation through an array of acquisitions in a rising metals market. He stepped down as chief executive in September 2007, but remained with the company and close to his successor Marius Kloppers when BHP launched a typical top-of-the-market US$66 billion bid for rival miner Rio Tinto, itself then trying to digest its own acquisition spree, notably aluminum giant Alcan. Only Rio's determination to resist the takeover saved BHP from the potential disaster of such a costly acquisition and Goodyear being classified with the Wall Street crowd whose hubris and arrogance has become the biggest ever bonfire of the vanities.

Ho Ching proved the classic bull market player with Singapore's public funds. At first she could claim success in raising returns by more active management of Temasek's investment portfolio – and in rising markets always report profits generated by disposals as well as by the operating profits of its major assets, the Singapore property, banking, power, telecoms, aviation and shipping companies.

But under her leadership, and spurred by foreign advice, a larger and larger proportion of assets were invested in the financial sector. By March 2008 this had climbed to no less than 40 percent of Temasek's portfolio. Nor was that enough. It continued to believe in Wall Street's self-delusions that first half 2008 just saw a few "localized difficulties" rather than the richly deserved meltdown that occurred, increasing its stakes in Merrill Lynch, Barclays and others, and putting most of its China investments into banking.

Even as late as the end ofAugust, a managing director, Marish Kejriwal, was being quoted as saying "The financial services industry is one we believe in… It is a proxy to the economic growth" – an extraordinary statement and one which showed that Temasek had learned nothing from the Asian crisis of a decade ago, or from Japanese financial troubles, or indeed the mid-1980s banking failure in Hong Kong and Malaysia etc. To make matters even worse, Kejriwal also noted "We recently concentrated on US and UK primarily because we see value."

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Temasek's overall performance is hard to assess. Although more transparent than most sovereign wealth funds, it still falls far short of what a public company would have to report. The performance of its major listed subsidiaries is easy enough to track but there is a lot that does not appear, including methods of valuation of some huge, leveraged investments made in private equity funds.

Injections of capital from the Ministry of Finance are also a key to its expansion. For example, last financial year its portfolio value rose by 13 percent to S$185 billion but much of this was apparently accounted for by an official injection. Nor are there any details on dividends, if any, paid to the MoF.

Indeed, not only are the accounts skimpy and largely lacking in the notes normally found but anyone wishing to track the latest Annual Review against past ones will be unable to do so via the Temasek Holdings website, which now has only the latest Review (2007-08) not the previous ones.

What can be deduced, however is that reported profits last year, which zoomed 50 percent to S$20 billion on revenue of just S$83 billion, owed much to disposals, including Tuas Power for S$4.2 billion. The rundown in Singapore assets has been marked. They are now only 33 percent of the total compared with 38 percent a year earlier. This trend is presented as a necessary and valuable diversification, but it also helps maintain profits as the Singapore disposals are mostly of assets acquired years ago and thus can generate big capital gains.

Apart from the trend to non-Singapore assets, there have been two other trends. One is towards non-Asian OECD markets such as US and UK, and the other to unlisted and so-called "liquidity" investments. These mostly opaque investments now account for 52% of total assets helping to further obscure the details.

The latest Review also has a none-too-subtle Ho Ching boast. Assets acquired in the previous six years are credited in one chart with annual growth in value of 32 percent, or double the 16 percent by assets held prior to 2003. It is not hard to imagine that the numbers for 2009 will look rather different – assuming they are published. Nor was the 10-year annual Total Shareholder Return as published particularly impressive – 9 percent since the dark days of the Asian crisis.

But whatever the performance, the skimpy nature of Temasek's published data makes independent analysis very difficult – even assuming that the major brokers, rating agencies and investment banks would ever be willing to incur official wrath by attempting to do so.

As for Goodyear, even with the help of a big capital profit on the December sale of PowerSeraya to Malaysia's YTL for S$3.8 billion, his first Annual Review as Ho Ching's successor will need some remarkable accounting contortions if it is not to look grim indeed.