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Temasek Loves Wall Street

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This morning everyone is passing around the Temasek report, in which Singapore's sovereign wealth investment fund indicates that it still "sees value" in banking stocks in the US and Britain. Wall Street is acting like a girl who just found a crumpled note in a school desk with her name inside a heart. But before it swoons too deeply, it might want to check the other initials in the heart.
Temasek insists it's not a sovereign wealth fund. It's more open than many sovereign wealth funds, and more independent when it comes to investment decisions. It also claims that it is now a sovereign version of a closed end fund, unable to tap the state treasury for new funds. But it is 100% owned by the Sinapore Ministry of Finance, and suffers from many of the problems of state investment funds.
The one we'll focus on the fact that Temasek probably has too much money to invest. It has far more assets than is necessary for hedging government portfolios against cyclical downturns. It would arguably do better to return a large portion of its wealth to the people of Singapore as a dividend, where individuals at different stages in their lives could spend and invest the dividend to suit their needs.
The over-supply of funds, together with Temasek's compensation structure (executives have long-delayed bonus structures), encourage long-term risk taking that wouldn't be acceptable for most investment funds. Temasek needs investment opportunities and when those are scarce, its portfolio managers need to look pretty deep into the chasms of the market. Given this structure, Temasek's bets on US financials, such as its decision to at to its $5.9 billion investment in Merrill, is hardly a sign that US financials are likely to recover any time soon.
For more on Temasek's financial company investments, see FT Alphaville's take.


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