Sept. 23 (Bloomberg) -- Government of Singapore Investment Corp., overseeing more than $100 billion of reserves, is turning to emerging markets and private equity to boost returns after cutting back stocks and investments in developed nations.

The fund, known as GIC, raised holdings of natural resources and hedge funds, and cut bonds to a quarter of its portfolio from more than three quarters 25 years ago, it said. Stock sales since mid-2007 enabled it to spend $18 billion on stakes in UBS AG and Citigroup Inc. in the past year, and it's holding more cash now.

``We see a more challenging investment environment,'' Chief Investment Officer Ng Kok Song said today. ``The powerful trend of disinflation that propelled the global capital markets over 25 years seems to have ended.''

GIC, whose chairman is Singapore Minister Mentor Lee Kuan Yew, said annual returns in the past 20 years averaged 7.8 percent in U.S. dollar terms, compared with 7 percent for the MSCI World Index. The fund wants a longer-term investment performance after the 1997 Asian financial crisis, 2001 Internet slump and the credit crisis damped returns in recent years.

The subprime meltdown sent the MSCI World Index to the lowest in three years, wiping out almost $14 trillion from global stocks this year. GIC's investments in developed nations make up at least 70 percent of its portfolio.

`Isn't Exciting'

Temasek Holdings Pte, Singapore's state-owned investment company with a $130 billion portfolio, has had an average annual return of 18 percent since it was created in 1974. Norway's sovereign wealth fund posted a 3.6 percent return since 1998, while U.S. billionaire Warren Buffett's investment firm Berkshire Hathaway Inc. gained 21 percent in the past two decades.

GIC's return ``isn't exciting at all,'' said Beat Lenherr, who helps oversee more than $20 billion of assets as chief global strategist at LGT Capital Management in Singapore. ``The slowdown in the U.S. economy will affect growth in emerging markets and the outlook for earnings.''

GIC said it expects investments in Asia to rise as it adds more assets in emerging markets. Investments in the U.S., U.K. and Japan make up 53 percent of its portfolio, it said today.

``Despite the fact we have progressively increased our investments in the emerging economies, developed economies still absorb the bulk of our funds because this is where the size of the markets, the liquidity and indeed, the large investment opportunities reside,'' Ng said at a press conference today.

`Good Long-Term Bets'

UBS shares have fallen 59 percent since GIC announced the investment in December, and Citigroup has declined 26 percent since the government fund's purchase in January, as both banks wrote off almost $100 billion on subprime investments.

Ng, 60, said he's ``confident'' both investments will offer long-term returns, though said timing of the purchases could have been better. The fund received undisclosed reset payments from the two banks to compensate for the decline in the share prices.

``Sovereign wealth funds like GIC understand that these large banks are good long-term bets,'' said Don Gimbel, a Montana-based senior managing director at Carret & Co., which oversees about $2 billion. ``Like other global investors, sovereign funds have taken big hits in the last 12 months.''

GIC was ``surprised'' at the magnitude of the credit crunch, though it's ``not closing the door'' on opportunities emerging from the crisis, Ng added, with the ``distressed'' situation in the U.S. offering opportunities.

`Substantial' Cash Levels

Banks worldwide have reported more than $500 billion in losses and writedowns. The credit crunch led Lehman Brothers Holdings Inc. to file for bankruptcy and forced the sale of Merrill Lynch & Co. to Bank of America Corp. last week.

GIC's holdings of stocks have fallen to 44 percent of its portfolio from about half two years ago, while its investments in alternative assets such as private equity and real estate rose to 23 percent from 20 percent. Cash made up 7 percent as of March.

``Starting from May last year, GIC has raised substantial levels of cash in anticipation of a crisis in the global credit and housing markets,'' Deputy Chairman Tony Tan said at the briefing today. ``Even after our significant investments in UBS and Citigroup, GIC continues to hold large cash reserves as a strategic safeguard.''

The Americas made up 40 percent of its assets, down from as much as 45 percent two years ago. Investments in Europe rose to 35 percent from 25 percent. Asia now accounts for 23 percent of its investments, with Japan making up almost half of them.

More Disclosure

The 20-year returns announced today are part of efforts to disclose more amid rising scrutiny of sovereign funds as they increase investments globally, GIC said. It expects to release its asset allocation and long-term returns every year. GIC last disclosed its returns two years ago on its 25th anniversary.

The average return over the two decades was 5.8 percent in Singapore dollar terms, said GIC, set up in 1981 to manage the city-state's foreign reserves.

Hong Kong's Exchange Fund, the $181 billion pool of assets that backs the city's currency, had an investment loss of HK$35 billion ($4.5 billion) in the first half because of declines in global equities.

Temasek, which led investments in Merrill Lynch and Barclays Plc in the past year, said returns from holdings in publicly listed companies slowed to 7 percent in the 12 months ended March from 27 percent the previous year.

To contact the reporter on this story: Chen Shiyin in Singapore at schen37@bloomberg.net; Shamim Adam in Singapore sadam2@bloomberg.net.

Last Updated: September 23, 2008 06:59 EDT