Government of Singapore Investment Corporation (GIC) yesterday reported that its assets under management fell by more than 20% in the fiscal year to March 31, 2009, but said it has recovered around a half of those losses during the recent rally in global stockmarkets.

"The market environment in 2008 was one of the most difficult faced by investors in the last 50 years," GIC deputy chairman Tony Tan Keng Yam said in the annual report. "Like all large institutional investors around the world, GIC found its portfolio impacted by the severe downturn in the world's economic and financial markets in 2008." And he added: "GIC's investment horizon of 20 years enables us to stay focused and not be distracted by volatile short-term movements".

Part of that long-term focus is likely to mean a shift of a greater part of its investments into less conventional asset classes.

The investment fund increased its allocations to alternative investments, such as hedge funds, private equity and property, to 30% from 23% in the previous fiscal year. GIC also indicated that it plans to convert more of its cash holdings into investments in emerging markets and natural resources.

"Global economic growth will be higher in the emerging than the developed economies. The developed economies will undergo further deleveraging while the emerging economies will be compelled to engender domestic demand," wrote chief investment officer Kok Song Ng in his conclusion in the annual report.

In the year to March 2009, GIC's allocation to equities fell to 38% from 44%, while its allocation towards bonds dropped to 24% from 26%.

The fund's cash pile rose to 8% from 7%, and was as high as 10% when it significantly reduced its equity holdings. "We had reduced public equities by more than10% over the period July 2007 to September 2008. This precautionary strategy helped the portfolio to avoid a larger loss in the ensuing bear market", said Ng.

It subsequently used some of that cash to buy stocks at the beginning of 2009. "In early 2009, we decided this defensive posture was no longer warranted. Aggressive fiscal stimuli by governments and significant monetary easing by central banks had averted a scenario of economic depression, and stock markets were generally fairly priced. We have thus restored public equities to pre-crisis levels," said Ng.

Between the two fiscal years, the fund's allocation to the US was raised to 38% from 34%, its exposure to Europe fell to 29% from 35% and the proportion of its investments in Asia stayed fairly constant at about 24%.

GIC, the biggest of the two investment funds owned by the Singapore government, is believed to manage anything between $100 billion and $200 billion of Singapore's foreign exchange reserves, and is headed by minister mentor and former prime minister Lee Kuan Yew. The fund made two new senior internal appointments in July.

GIC's performance in the year to end-March was similar to Norway's wealth fund (the world's third biggest), but worse than its regional rival, the China Investment Corporation (CIC). The MSCI World Index slumped by 44% in the 12 months to the end of March, and has since rallied about 65%.

Earlier in September, the city's second largest state-run fund, Temasek Holdings, disclosed that the value of its portfolio dropped by 30% to S$55 billion ($38.76 billion) in the year to March. It too has recovered most of its losses since then.

Like Temasek, GIC's performance has been largely determined by its substantial investments in bank stocks at the initial stages of the credit and financial crisis last year. Although it made a $1.6 billion profit by cutting its stake in Citi to less than 5% from 9% last week, GIC said it continues to lose money on its holding in Swiss bank UBS.

"The investment thesis was to capitalise on the unique business franchises of UBS in global wealth management, and of Citigroup in global consumer and corporate banking, especially in the emerging economies," Ng explained. And "while both banks still face challenges in returning to profitability, we maintain our confidence in their long-term prospects," he added.

But Ng conceded that the investment in UBS will "take longer to recover". GIC said in August that it hadn't bought any of the Sfr6 billion ($5.9 billion) of UBS shares sold by the Swiss government.

Unlike Temasek, which shocked the markets in July when chief executive-designate Charles Goodyear suddenly left, GIC neither publishes a financial statement nor declares the total size of its assets and its major holdings. But in order to assuage public concern and garner better publicity, both wealth funds have chosen to update their year-end performance figures.

GIC's nominal annual returns in the past 20 years have averaged 5.7% in US dollar terms, compared with Temasek's 20-year annualised return of 13%.

Looking to the future, CIO Ng warned that "after a prolonged period of disinflation in the global economy, there is greater risk of rising inflation", due to government fiscal stimulus packages. He also envisaged an investment environment restricted by greater regulatory intervention and characterised by fewer leveraged opportunities as banks are forced to raise their capital adequacy requirements.

These changes, he said "will require GIC to adapt its investment strategy accordingly".