Developing a strategy resilient to risk
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Developing a strategy resilient to risk

The Government Pension Fund is crafting an adaptable portfolio that can withstand volatility

Mr Songpol says managing rapid change has become more challenging.
Mr Songpol says managing rapid change has become more challenging.

The original description of an economic cycle estimated it lasted for roughly a decade and included one crisis per cycle. Given recent severe global volatility, this definition no longer holds true.

Today crises can recur repeatedly within a short time frame. Under such circumstances, the adage "high-risk, high-return" no longer applies.

The main target in managing a large fund such as the Government Pension Fund (GPF) is to ensure its resilience to risk.


Songpol Chevapanyaroj, the newly appointed secretary-general of the GPF, oversees the second-largest fund in the country.

In an exclusive interview with the Bangkok Post, he said the approach to fund management has shifted. In the past, the primary focus was maximising profits, but with the constant potential for crises, this is no longer the case.

Mr Songpol said the GPF seeks a balance between risk and return. While high risk previously correlated with high returns, now high risk might yield low returns, whereas low risk might offer more stable returns, he said.

Moreover, changes in the global trading system have affected investment strategies.

While globalisation once emphasised the global supply chain, there is now a trend towards deglobalisation.

Trade restrictions, driven by geopolitical risks that have been emerging for several years, influence trade support or barriers, said Mr Songpol.

These restrictions highlight the need to meet specific criteria, such as achieving net zero emissions, reducing fossil fuel usage, adopting clean energy, using eco-friendly packaging and having green office buildings.

Failure to comply with such standards could result in a country losing the ability to trade with other countries, he said.

Mr Songpol said managing rapid change has become more challenging. In the past, risk management challenges lasted longer, but today, new challenges arise more quickly.

Adjusting investments to suit the evolving environment is essential to ensure resilience against future risks and the survival of fund investments, he said.

"To prepare for investment, we must engage in strategic asset allocation or asset management. In the past, planning investments in assets over a period of 10 years might have been feasible, but current volatility necessitates shorter investment planning horizons," said Mr Songpol.

"Thirty years ago, if we invested in stocks or bonds, there were few changes and the outcomes were generally predictable. Today things change more rapidly, often making a 10-year investment period too long. We review our strategic asset allocation to ensure our investments include both market-referenced and non-market-referenced assets, both domestically and internationally."


He said as a large fund, the GPF needs to build resilience by investing internationally.

This diversification allows the fund to achieve appropriate returns relative to the risks involved.

GPF's investment scope has broadened to include various asset types and characteristics, including more alternative assets than before.

This diversification offers greater opportunities than in the past, said Mr Songpol.

The previous goal was for every investment to be profitable, but now some investments may earn a profit, while others incur losses.

The net should balance out over the long term, he said.

"Past markets tended to trend upward or downward, but today's markets lack a clear trend and are highly volatile, making it challenging to predict market movements. Balancing asset allocation to manage risk effectively is a significant challenge," said Mr Songpol.

"Who would have thought after the pandemic there would be a war between Russia and Ukraine, lasting at least a few years, with the Israel-Hamas conflict following it?"


He said the GPF is conducting a study on investment weighting, which is expected to be completed in the early part of the fourth quarter.

The study aims to identify the characteristics of assets that can enhance their resilience to risk over the next three years.

"The difficulty in investment allocation is you cannot fully rely on either domestic or foreign investments," said Mr Songpol.

"The world is moving towards deglobalisation, regionalisation or localisation, resulting in the movement of capital, returns, and bases back to a more regional scale."

For example, the chip shortage was attributed to production issues in certain countries, prompting business owners to reassess their dependence on a single country for production and evaluate whether it increased risk and undermined competitiveness.

This situation provided an opportunity for local entrepreneurs to review and enhance their operations, he said.

Referring to the GPF, Mr Songpol said the asset allocation strategy considers these factors, with significant changes causing an adjustment of its medium-term strategy.

"The GPF is not a profit-driven entity. We are not speculators -- we are investors. Earning profits from capital gains is not the primary focus. Instead, we consider returns from dividends and interest income from investments as the main focus," he said.

"Achieving our targeted minimum return of the 10-year average inflation rate plus at least 2% is challenging because the assets we invest in are not overly risky, with GPF conditions requiring 60% be invested in debt securities. This means if interest rates decline steadily, we will still receive some interest income. The remaining 40% is not restricted to debt securities, but must fall within an acceptable risk framework. We are also restricted to a maximum of 60% international investments, even if international yields are favourable.

"Government bonds yield around 2%, even for short-term ones. How can the GPF achieve the 10-year average inflation rate plus 2% when those are the yields? Although it's not easy to reach that goal, given the investment portfolio, I am quite confident we have a well-balanced allocation. I'm not too concerned about returns. We are performing better than the target."

The GPF has 1.2 million members and manages funds worth roughly 1.3 trillion baht, making it the second-largest fund in the country after the Social Security Fund.


Regarding Thailand's stock market, Mr Songpol said many companies continue to offer favourable operating results, even if their stock prices do not reflect this because of external factors.

Many stocks are priced below their book value, which should not be the case, he said.

"External factors are impacting our market, and investors continue to chase higher returns. Even though the [Thai] market offers returns, they might be lower than foreign investors expect. As a result, stock prices may not accurately reflect market conditions," said Mr Songpol.

"The GPF is focused primarily on the SET50 index."

He said the stock market's slow recovery is partially related to differing perspectives among foreign and domestic investors. Foreign investors have more options offering higher returns than the Thai market, leading to a slower recovery in the Thai stock market, said Mr Songpol.

"However, I believe the index has likely passed the lowest point of the downturn, though recovery may still take some time. The government is trying to find ways to stimulate the economy, whether through joint ventures, inviting foreign investments or encouraging domestic spending," he said.

"We can see signs of recovery in hotel occupancy rates, retail and other sectors."

The Thai economy recorded its nadir once the country reopened post-pandemic. Since then, Mr Songpol said everything has been gradually improving, with increasing foot traffic at shopping malls, which was not the case in countries where malls had to shutter.

The Thai service sector is gradually improving, while the manufacturing, agricultural and export segments are also rebounding, which means the outlook for next year is positive, he said.

Looking ahead five years, competition with other improving countries will prove a challenge for the Thai economy, said Mr Songpol.


In terms of debt securities, while the direction of US interest rates has not moved yet, he said he thinks debt securities remain an asset class in which everyone continues to invest.

"However, if interest rates are expected to rise, we might opt for short-term investments. Conversely, if rates are expected to fall, we might extend our investment horizon," said Mr Songpol.

"The GPF's investments currently tend to have a short duration, averaging no more than three years. This means we have enough flexibility to withstand rising or falling interest rates, potentially yielding better returns."

Regarding gold investment, he said the fund allocates only 1% of its total portfolio to this asset.

"In our investment strategy, gold serves as a hedge against inflation. In times of high inflation, gold investments help mitigate risks associated with currency devaluation. The metal also serves as a hedge against unpredictable events such as wars," said Mr Songpol.

"We obtained approval from the board to increase the allocation of commodities, including gold, oil and copper, from 1% to 3%. This adjustment marks the first time we've revised this allocation. However, going forward, we'll need to decide how to allocate these resources."

He said this year the GPF is reviewing all its investments, considering factors such as geopolitics and the impacts of deglobalisation to develop a new strategic asset allocation (SAA).

This SAA adjustment follows previous changes made during the pandemic, and the new plan would be valid for 3-5 years, said Mr Songpol.

"Looking back over the past decade, our performance has managed to outperform inflation, with an average return of 4%," he said.

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