SINGAPORE—Singapore's over $300 billion sovereign-wealth fund sees no end in sight for the era of low returns as anemic interest rates and sluggish growth weighed on one of the world's biggest state funds.

"These difficult investment conditions can stretch for the next 10 years," said Lim Chow Kiat, GIC Pte. Ltd.'s chief investment officer, on Wednesday.

The sovereign-wealth fund, charged with managing the country's foreign-exchange reserves, said in its annual report that it earned a 3.7% annualized nominal rate of return over the past five years through the end of March. That compares with a 6.5% return for the five years through the end of March 2015.

GIC is one of the world's biggest sovereign funds and has parked more than one-third of its investments in the U.S. It owns big stakes in Citigroup Inc. and UBS Group AG, which it collected when those banks raised funds during the global financial crisis.

Many global funds like GIC have seen the value of their holdings rise since the global financial crisis as central banks pursued cheap-money policies that boosted asset prices. Now, those same policies have crimped their expectations for returns.

"We are running a more defensive portfolio," Mr. Lim said.

GIC boosted its holdings of bonds and cash to 34% at the end of March from 32% the prior year. It cut exposure to developed stock markets to 26% from 29% in the prior year and slightly increased its holdings of emerging-market stocks, to 19% from 18%. Investments in private equity and real estate accounted for 9% and 7% of its portfolio, respectively, both unchanged on a year earlier.

"The steady returns delivered will be challenged by uncertainties brought on by the low-yield environment all investors are facing," Mr. Lim said.

Other sovereign funds, which manage some of the largest portfolios in the world, have also warned of tougher times ahead. Norway's nearly $900 billion fund, the largest of its kind, recorded its weakest performance last year since 2011, blaming low returns partly on slowing growth in emerging markets.

GIC oversees about $344 billion in assets, according to the Sovereign Wealth Fund Institute, making it the world's eighth-largest sovereign fund.

The Americas remain GIC's biggest investment destination, accounting for 42% of its assets, while Japan accounts for 11% and the rest of Asia around 20%. The fund's allocation to these regions didn't change substantially in the past year.

GIC doesn't provide a specific outlook for its own investments but illustrates its performance against a so-called reference portfolio that represents the risk profile the Singapore government is prepared to take, comprising 65% U.S. equities and 35% U.S. bonds. The fund said it expects such a portfolio to return 1%-2% in real terms over the next 10 years, well below its historical average of 5.2%.

GIC doesn't disclose specific investments in its results, but the Singapore fund has been an active investor in deals in sectors including infrastructure, property and technology. In April, GIC entered into an agreement to buy a 19.9% equity interest in ITC Holdings Corp., a U.S. based independent electric transmission company for about $1.23 billion. In June, GIC along with Temasek Holdings Pte. Ltd. acquired shares of Chinese internet giant Alibaba Group Holding Ltd. sold by Japan's SoftBank Group Corp. and totaling $1 billion. In June, the company agreed to buy shares in Irish telecommunications group Eir that valued the firm at around $4 billion.

"Even as we expect the real returns for the GIC portfolio to be lower going forward, we aim to take advantage of our long-term horizon, skills and global reach to find attractive investment opportunities," Mr. Lim said.

The sovereign-wealth fund measures its own performance over the long term. GIC said its investments gave it a 4% annual real rate of return over the 20-year period that ended March 31, or a 5.7% return over the same period in U.S. dollar terms. That is lower compared with last year, when GIC reported a 4.9% annual rate of return for the 20 years ending March last year, or 6.1% in U.S. dollar terms. All figures are above the global inflation rate.

Write to P.R. Venkat at venkat.pr@wsj.com and Jake Maxwell Watts at jake.watts@wsj.com

 

(END) Dow Jones Newswires

July 27, 2016 19:05 ET (23:05 GMT)

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