Institutional Investment - December 14, 2010

Academic research can play a useful role - an interview with Tai Tee Chia

In this interview, we talk to Dr Tai Tee Chia, Deputy Chief Risk Officer and Director of the Risk and Performance Management Department, Government of Singapore Investment Corporation (GIC) and a member of EDHEC-Risk Institute's International Advisory Board, about the usefulness of academic research in finance, the issues GIC focus on in asset allocation and risk management, and GIC's future investments in emerging economies.

Dr Chia Tai Tee, Government of Singapore Investment Corporation (GIC)

You have recently joined EDHEC Risk Instituteís advisory board; why is academic research important to an investor like GIC and why devote time out of your busy schedule to help define EDHEC- Risk Instituteís research agenda?

Chia Tai Tee: The financial industry is constantly evolving -new investment opportunities are constantly being uncovered and new products are constantly being introduced. Academic research can play a useful role in developing the analytical tools to help us better understand the risks and to make better investment decisions. Academic research can also help to provide important insights on the unique challenges faced by Sovereign Wealth Funds like the GIC and help to design solutions.

In the field of asset allocation and risk management, what are some of the issues that GIC is particularly interested in?

Chia Tai Tee: Investors are increasingly coming to the view that allocating by traditionally defined asset classes has limitations. Many have started exploring the possibility of allocating using risk factors instead. I believe that this is a fertile area for research and can lead to a radically different (and hopefully) superior portfolio construction. In risk management, the modelling of risks for private market investments and hedge funds receives a lot of our attention.

EDHEC Risk Institute has recently released a publication presenting a dynamic asset allocation framework for sovereign wealth funds that takes into account the stochastic features of the endowment process, the expected liabilities, and the assets held. The publication, produced as part of the "Asset-Liability Management Techniques for Sovereign Wealth Fund Management" research chair at EDHEC-Risk Institute sponsored by Deutsche Bank, suggests that the fundís investment strategy should involve a state-dependent allocation to three building blocks, a performance-seeking portfolio, an endowment-hedging portfolio, and a liability-hedging portfolio. In your opinion, what can GIC and other sovereign investment vehicles take home?

Chia Tai Tee: This is a useful framework in helping to articulate the objectives and constraints faced by sovereign wealth funds. It drives home the point that each SWF will have a different optimal portfolio depending on its unique situation. One should therefore be very careful in comparing the performances of different institutions.

In its 2010 annual report, GIC discloses that it intends to significantly grow the share of its assets invested in emerging economies; what is the rationale for this and are they any particular challenge you envision on the road to achieving this goal?

Chia Tai Tee: Our view is that the macro-economic environment over the next 10 years is likely to be lack lustre for the developed economies as they struggle to cope with de-leveraging and problems with public debt. In contrast, the emerging market economies have rebounded sharply from the crisis and are now enjoying the benefits of past restructuring and stronger economic fundamentals. We think that they will continue to grow strongly. GIC is fortunate to be situated in the middle of the fastest growing region of the world with the two big giants, China and India, set to play a much bigger role in the world economic scene. We have built up a strong operating capability in research and asset management, as a well as a valuable network of contacts in Asia over the years. These put us in a good position to increase our investments in the emerging economies, especially in Asia.

About Chia Tai Tee

Dr Tai Tee Chia was appointed Deputy Chief Risk Officer and Director of Risk and Performance Management Department on 1 July 2010. He joined the GIC in 1994 and had held various positions in Economics & Strategy, Foreign Exchange and Quantitative Investments.

In the last 7 years, he was with the Investment Policy & Strategy Department. Dr Chia served as a member of the National University of Singapore Investment Committee (2005- 2010) and continues to serve on the People's Association Investment Advisory Committee (since 2005). He graduated from the University of Adelaide in Economics and holds a PhD from the Australian National University.

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