July 30 (Bloomberg) -- Temasek Holdings Pte’s decision to consider managing money for outside investors may help it overcome foreign governments’ concerns about sovereign wealth fund investment and drive expansion over the next decade.

The Singapore fund may seek “sophisticated co-investors” in five to eight years and retail investors in the next eight to 10 years, Chief Executive Officer Ho Ching said during a speech in Singapore yesterday. Temasek has been exploring the plan for the past three years and may have a “clearer” picture of the platform it will adopt in the next 12 months, she said.

“All sovereign wealth funds are met with suspicion and public investment will dilute the reputational risk,” said Jan Randolph, head of sovereign risk at IHS Global Insight Inc. in London. “It’s blurring the lines between public and private investment. This may be the future of sovereign wealth funds.”

Temasek, founded in 1974 to foster development of Singapore’s banks, airlines and ports, now holds stakes in financial services, real estate, telecommunications, energy and transportation in at least four continents. A 2003 bid by a Temasek unit to buy Hamilton, Bermuda-based Global Crossing Ltd.’s 100,000-mile U.S. fiber-optic network faced opposition from the U.S. Defense Department.

The purchase was subjected to a 45-day probe by the Committee on Foreign Investments, a panel that examines whether sales of U.S. assets to foreign companies would undermine national security.

18% Returns

Temasek in 2006 led a group to buy Thailand’s Shin Corp. from investors including the family of former Premier Thaksin Shinawatra. The purchase sparked street protests and deepened a political crisis that culminated in Thaksin’s ouster in a coup the following year. Shin controls Thai satellite operator Shin Satellite Pcl, and the country’s military accused Singapore of using the company’s assets for spying.

The fund has had an annual return of about 18 percent a year since its inception, even as the value of its assets plunged by more than S$40 billion ($27.7 billion) in the 12 months ended March 31.

“They are selling their expertise as a fund that can manage different asset classes,” said Lim Jit Soon, a strategist at Nomura Securities in Singapore. “They are trying to market themselves not as a sovereign wealth fund but as a fund manager with certain embedded expertise.”

Temasek is the biggest shareholder in five of Singapore’s 10 biggest publicly traded companies by market value, including Singapore Telecommunications Ltd., Southeast Asia’s biggest phone company, and DBS Group Holdings Ltd., the region’s largest bank by assets.

Financial Services Stakes

“Temasek is capitalizing on its network and can leverage benefits from that by inviting outsiders into their funds,” Randolph said. “It has a lot of experience, a lot of talent and a broad portfolio allocation. All that can draw in fee income.”

The investment company has increased its financial services holdings to 40 percent of its portfolio with stakes in Merrill Lynch & Co., Barclays Plc and Standard Chartered Plc. It also has holdings in India’s ICICI Bank Ltd., China Construction Bank Corp. and lenders in Indonesia, South Korea and Pakistan.

“Everyone has taken a hit in one way or another, and not all investment funds will respond the same to the losses they’ve taken,” said Edwin M. Truman, a senior fellow at the Peterson Institute for International Economics who specializes in sovereign wealth funds. “Some funds are going to be more conservative or cautious.”

‘More Inclusive’

Temasek is considering the creation of one more group of stakeholders, Ho, 56, said yesterday.

“It is important to test this over at least one market cycle during the next five to eight years,” she said. “If this pilot is successful, we may then consider a co-investment platform for retail investors in perhaps eight to 10 years’ time.”

The appointment of Temasek’s first foreign CEO, Charles “Chip” Goodyear, collapsed a week ago because of differences over strategy, raising concerns over transparency and management control after losses on Merrill Lynch and other financial investments dragged down its performance last year.

Temasek’s S$127 billion of assets as of November compared with $328 billion managed by the Abu Dhabi Investment Authority at the end of the year, and $200 billion managed by China’s sovereign wealth fund.

Temasek’s plan to accept public investment isn’t an effort to increase the size of the funds it manages, said Joseph Tan, chief economist for Asia at Credit Suisse Group AG in Singapore.

“Temasek has already far outsized many of the private sector funds, and this isn’t an attempt to try to measure up to the big sovereign wealth funds,” Tan said. “There’s no way Temasek can keep up in size with the likes of China and its amount of foreign exchange reserves accumulation and foreign assets. This is not an issue of size but an attempt by Temasek to become more inclusive and more transparent.”

To contact the reporter on this story: Shamim Adam in Singapore at sadam2@bloomberg.net

Last Updated: July 29, 2009 22:16 EDT