Aug. 21 (Bloomberg) -- Temasek Holdings Pte, the biggest shareholder in Merrill Lynch & Co., may acquire a larger stake in a bet the U.S. securities firm will rebound.

``If there's an opportunity, we would like to look at it,'' S. Dhanabalan, chairman of the Singapore state-owned investment company, said in a speech in the city state today. ``Whether we do it depends on our assessment and risk diversification.''

Merrill's shares have fallen 55 percent since Dec. 24, when Temasek first paid $5 billion for about 5 percent of the third- biggest U.S. securities firm. Temasek is seeking to raise its overseas holdings to diversify beyond Singapore, where it controls six of the city's 10 biggest companies by market value.

Sovereign wealth funds including Temasek, Kuwait Investment Authority and China Investment Corp. have helped banks such as UBS AG and Citigroup Inc. replenish more than $200 billion of capital after losses and writedowns from the U.S. subprime meltdown.

Temasek is often considered Singapore's second sovereign wealth fund. Government of Singapore Investment Corp., or GIC, manages more than $100 billion of the country's reserves.

Temasek's assets rose 13 percent to S$185 billion ($131 billion) in the year ended March from S$164 billion a year earlier, Dhanabalan said today. The MSCI World Index fell 5.1 percent during that period.

More Merrill Investment

The company said last month it's committing a further $900 million in Merrill after it was compensated for the initial investment. Temasek said it will use a $2.5 billion so-called reset payment for losses from its earlier purchase toward buying $3.4 billion of Merrill stock. Merrill will book the reset as an expense, as well as $5.7 billion of additional writedowns.

The purchase would push Temasek's stake beyond the 10 percent limit for foreign investors. A portion of its new stock requires regulatory approval, Temasek said.

Temasek's investment comes after Merrill booked $51.8 billion of writedowns and credit losses following the collapse of the U.S. subprime mortgage meltdown, the second-highest after Citigroup's $55.1 billion.

Merrill's losses led to the replacement of Chief Executive Officer Stan O'Neal with John Thain, who in May raised $9.8 billion in a share sale and sold collateralized debt obligations for 22 cents on the dollar to Lone Star Funds, a Dallas-based investment manager.

Long-Term Investor

GIC, which has invested about $18 billion in UBS and Citigroup, may add more bank assets as it chases returns over periods as long as 30 years, Singapore's Minister Mentor Lee Kuan Yew, chairman of the sovereign fund, said in an April 29 interview.

Temasek increased its banking assets with a second investment in Barclays Plc in June, when it committed a combined 4.5 billion pounds ($8.4 billion) with China Development Bank. The shares were bought at a lower price than what the two paid when they invested 3.6 billion euros ($5.3 billion) a year ago.

``One has to believe in investing in the longer term, whether locally or globally,'' said Tan Teng Boo, who helps oversee about $250 million at i Capital Global Fund in Kuala Lumpur. ``The pessimism driving the Western financial institutions down is so extreme right now that for longer term investors like Temasek it does make sense to get some exposure.''

Temasek, which took over state assets such as shipyards and an airline three decades ago, posted an average 18 percent annual return since its inception, Dhanabalan said. Among its biggest investments in the city-state are Singapore Telecommunications Ltd., Southeast Asia's biggest phone company, and DBS Group Holdings Ltd., the region's largest bank by assets.

``We're a long-term investor and we're not a conventional investor in the public markets,'' he said. ``We ride out the ups and downs of the market. But we certainly look at what the returns of the public markets are.''

Sovereign wealth funds make up 2 percent of the world's stock and bond markets, Dhanabalan added, and investors ``overestimate'' them. There's also a perception these funds aren't set up just to maximize returns because of a lack of governance and transparency, he added.

To contact the reporter on this story: Jean Chua in Singapore at jchua4@bloomberg.net.

Last Updated: August 21, 2008 06:54 EDT