Singapore's state-owned Temasek Holdings warned that growing protectionism in Europe and the United States towards it and other sovereign wealth funds could hurt its expansion as it seeks higher returns abroad.
Temasek, which owns stakes in Barclays, Standard Chartered, and China's big banks, is one of a stable of state investors with deep pockets and global ambitions which face increasing scrutiny by Western governments.
The International Monetary Fund said in June it was growing uneasy about the trillions of dollars managed by largely secretive sovereign wealth funds because it fears their activities could disrupt financial markets.
Temasek also reported a 29% drop in net profit to S$9.1 billion ($6 billion) for its 2006/07 financial year from S$12.8 billion a year ago, on lower divestment gains and an impairment charge on Thai telecoms firm Shin Corp., which lost one-third of its stock-market value in the period.
"The free flow of investment is important for economic growth," Ng Yat Chung, managing director of portfolio management at Temasek, told a briefing on Thursday. "We would be concerned" about any move towards protectionism in the developed economies, he added.
Government-owned investment vehicles such as Temasek and its sister agency Government of Singapore Investment Corp (GIC) control about $2 trillion -- roughly the size of France's economy -- and are expected to grow to $12 trillion by 2015.
"The relative success of Temasek and GIC has led to other countries emulating their sovereign wealth fund model," Citibank economist Chua Hak Bin said.
"These players are much larger (than Temasek and GIC) and are seen as more of a threat to national strategic interests. Unfortunately Singapore may be indirectly affected and this may limit their investment flexibility."
Ng acknowledged concerns over investment by state funds in key sectors such as telecommunications and banks but said Temasek, owned by Singapore's finance ministry, was different.
"We distinguish ourselves by our transparency," he said.
Temasek -- headed by Ho Ching, the wife of Singapore's Prime Minister, Lee Hsien Loong -- owns large stakes in many of the city's biggest firms, including Singapore Telecommunications, DBS Group Holdings, Singapore Airlines, and PSA International.
Temasek declined to disclose the size of the impairment charge on its Shin stake, but its annual report showed a S$830 million loss from associated companies, which include Shin.
A Temasek-led consortium bought Shin, Thailand's biggest telecoms group, from former Prime Minister Thaksin Shinawatra last year for $3.8 billion. The sale helped spark a prolonged political crisis in Bangkok.
Temasek said it had made S$16 billion of new investments in its 2006/07 financial year, against S$21 billion in the previous year. Last month, the government-owned fund agreed to invest up to 2.1 billion pounds in Barclays.
It divested assets of over S$5 billion in the year, against S$13 billion a year ago, while its portfolio value rose 35 percent to $108 billion from $80 billion.
"Temasek's investment outlook remains one of caution in light of medium-term geo-economic risks and signs of bubbly market conditions," Chairman S. Dhanabalan said in the review.
Temasek has expanded aggressively in Asia since 2002 in an effort to improve its long-term investment returns.
It reported a one-year total shareholder return by market value of 27% but stressed that it has no single benchmark against which it measures its returns.
The return compares with 32.6% on Singapore's Straits Times Index, and 20.7% on an index consisting of one third MSCI Singapore, the World, and Asia-Pacific excluding Japan. Over 10 years, its average return of 8% compared with 9.3% for STI, and 7.9% for the MSCI index.
While total shareholder return since 1974, when Temasek was set up, averaged 18%, the firm said it could be difficult to achieve a similar performance in future because of its large portfolio size and increasing competition for assets among state investors, private equity groups and hedge funds.
"We remain cautious of short-term volatility. We are a long-term investor and the 18% is not an absolute return target," said Yap Chwee Mein, a Temasek managing director.
The group declined to say how much it had paid Singapore's finance ministry as a dividend for 2006/07 but said its dividend yield was over 7%. That is well ahead of the sector average for Asian banks of 2%.
Singapore accounted for 38% of its total portfolio at the end of March, down from 44% the previous year. Asia ex-Japan accounted for 40% of the portfolio, up from 34% in the previous year.