Singapore’s sovereign wealth fund has for a second consecutive year undershot two performance indicators and forecast a decade of weak financial market returns.

The Government Investment Corporation's (GIC) annualised nominal return in US dollars was 12.4% over five years, 7% over 10 years and 6.5% over 20 years in the financial year to March 31.

Although the 10-year return was 30 basis points higher versus a reference portfolio used to indicate performance, the five-year return undershot by 150 basis points and the 20-year return was 70 basis points lower.

That is similar to last year, when GIC's return was 20 basis points higher than the reference portfolio over 10 years, but 80 basis points below over five years and 70 basis points lower over 20 years.

While the reference portfolio is not intended as a short-term benchmark, a comparison of returns over five, 10 and 20 years indicates the near, medium and long-term performance of GIC’s portfolio.

But with an annualised 20-year real rate of return that averaged 4.1% above global inflation, GIC more than met the minimum stipulation of its mandate to preserve the purchasing power of reserves.

The annualised rate of return on March 31, 2012 was 3.9%, unchanged from the year before.

The reference portfolio comprises 65% global equities and 35% global bonds and reflects the Singapore government’s long-term risk appetite.

In its recently released annual report, GIC pointed to a decade ahead of challenging investment conditions due to normalising monetary policy and rising interest rates.

Because the outlook for economic growth has not improved as much as asset prices, the fund said that all the major asset classes would be affected by low starting yields and low potential future returns. It expects its returns over the next 10 years to come in around the current level.

On April 1 last year, the fund implemented a more flexible and streamlined investment framework, as reported.

The rejigged approach is based on three pillars: the reference portfolio; a policy portfolio comprising six core asset classes – down from 13 previously; and an active portfolio, which can deviate from the policy portfolio and add value through active, skill-based strategies.

Under the policy portfolio, GIC buys more of assets that have fallen in value and sells some of the assets that have risen, to keep the asset mix steady over time.

In the last fiscal year, GIC reduced its portfolio exposure to developed market equities from 36% to 29% and real estate from 8% to 7%.

It increased its exposure to emerging market equities (17% to 19%), nominal bonds and cash (29% to 31%), inflation-linked bonds (2% to 5%), real estate (8%) and private equity.

Turning to geographical allocations, the fund reduced its exposure to the Americas, Asia and Australasia and increased it to the eurozone.

While the fund says only that it manages assets of more than $100 billion, the Sovereign Wealth Fund Institute’s latest estimate for GIC's assets under management is more than three times that at $320 billion.

Related stories on AsianInvestor:

GIC wins further $500m QFII quota

Why GIC won't provide full portfolio disclosure

Cashed-up GIC looks to take calculated risks