Temasek Holdings, the investment arm of the Singapore government, has found itself in a position where it has to explain the divestment of its Bank of America stake plus a S$58 billion ($40 billion) portfolio loss incurred in the period from March to November 2008. This loss amounts to around half of the S$114 billion gain that the firm made between 2003 and 2007.

Addressing the Singapore parliament on Friday, finance minister Tharman Shanmugaratnam said the sale of Temasek's Bank of America stake was the result of a reassessment of its investment in what was originally Merrill Lynch. He attributed the overall portfolio loss to the impact of the financial crisis on global market valuations.

Tharman says most of the portfolio loss, or around S$32 billion, can be blamed on the significantly lower valuations of 10 Singapore-listed companies, which fell by an average of 41% in the March to November 2008 period. These include Keppel, Singapore Airlines, CapitaLand, and Singapore Telecommunications. 

The rest of the portfolio loss was due to "unrealised losses" including mark-to-market losses from Temasek's investment in Merrill Lynch, Tharman adds.

Temasek bought 14% in Merrill beginning in December 2007. Its stake was converted into shares of Bank of America in January 2009 following Merrill's acquisition by the US bank in September 2008. Temasek divested its entire stake in Bank of America during the first quarter of this year.

Members of Singapore's parliament have questioned whether the sale of the Bank of America stake reflected a change in Temasek's investment strategy.

Tharman says Temasek has not abandoned its long-term investment strategy, however, and the sale of its stake in Bank of America doesn't signal any move to take a shorter-term approach. He noted that Temasek invested in Merrill Lynch because of the bank's specific business focus, but that needed to be reassessed when it merged with Bank of America, which has a wider exposure to the US economy.

"While Temasek has performed better than many other large investors over this six-year market cycle, it is not realistic to expect it to outperform in every cycle," Tharman says. "It is also not realistic to expect it to avoid losses on every individual investment, or losses on its overall portfolio when the markets go through sharp corrections."

Although the full-year accounts for the fiscal year ending March 2009 have not been audited, "the picture should not be fundamentally different" from November 2008, says Tharman.

The release of its fiscal year 2009 results in August will show how badly the holding company has been affected by the plunge in stock markets. Temasek is expected to post its worst ever returns after generating an impressive annual average return of between 17% and 18% since its inception.

In August last year, Temasek reported a record profit of S$18 billion ($12.4 billion) on assets worth S$185 billion ($128 billion) in the fiscal year that ended March 2008, but even then the firm noted that it saw limited opportunities in the coming years. At that time, Temasek chairman S Dhanabalan said volatility remained high and further contagion was expected in the US, Europe and Asia. He expected the fallout of the credit crisis to continue to dampen the global economy over the next 24 months, with sharply escalated oil and food prices beginning to test inflation expectations.

Before Tharman addressed the Singapore parliament last week, Temasek had already commented on its divestment in Bank of America.

"Temasek invests with the objective of delivering sustainable returns over the long-term," says Myrna Thomas, managing director for corporate affairs at Temasek. "This means our investment strategy is not aimed at delivering target returns on a year-by-year basis. This is why we report our portfolio returns not just for a single year, but for various time horizons."

Ultimately, Thomas says the aim is to ensure that our portfolio delivers returns that are higher than the cost of capital employed on a risk-adjusted basis.

"We decided to divest our Bank of America stake after considering all relevant factors," Thomas says. "While we do our best to mitigate risks, the reality is that not every one of our investments will be equally successful. We recognise that only time will tell if we have made the right decisions to deliver sustainable returns on our portfolio as a whole."

The management of Temasek is in a transition period at the moment.

In February this year, it announced that Charles "Chip" Goodyear will replace Ho Ching as chief executive officer on October 1. The former boss of the leading Anglo-Australian mining group, BHP Billiton, will be the first foreigner to run Temasek.

Goodyear left BHP Billiton in early 2008, having joined as CFO in 1999 after a career as an investment banker at Kidder Peabody. He joined Temasek's board on February 1 this year and has taken on the title of CEO-designate from March 1. His appointment has suggested that a redirection of the fund's investments towards the natural resources sector is likely. Last year, Temasek said that it was looking for investments in Brazil and Mexico to tap growth in Latin America's emerging economies and strong demand for commodities. Natural resources currently make up just a minority of Temasek's assets.

The departure of Ho Ching, who is married to Singapore prime minister Lee Hsien Loong and is the daughter-in-law of the city-state's minister mentor Lee Kuan Yew, came during a global market meltdown that rapidly eroded the value of many of the fund's investments.

Temasek has made high-profile investments in financial and telecom stocks as it has realigned its portfolio away from a concentration in domestic assets towards other Asian markets and Western banking groups. According to its most recent annual report for the fiscal year ending March 2008, two-thirds of its investments are in those two sectors.

Temasek is the smaller of Singapore's two investment companies. The Government of Singapore Investment Corp (GIC) manages an estimated $300 billion, but has also suffered losses from its investments in two other Western banks, Citigroup and UBS.