THE Government of Singapore Investment Corporation (GIC), one of the world's biggest sovereign funds, said it achieved a real return of 4.5 per cent over 20 years to March but saw a tougher environment ahead.

GIC said in its first annual performance report yesterday that it achieved an average annual nominal return of 7.8 per cent in US-dollar terms in the 20-year period that ended in March this year.

'Looking ahead we see a more challenging investment environment than what we have experienced since GIC's formation in 1981,' group chief investment officer Ng Kok Song said in the Singapore state investor's 48-page report.

Mr Ng said problems in the United States would present very interesting opportunities in impaired assets, and he added that developed economies will continue to be a big part of its portfolio.

He said GIC suffered some mark-to-market losses based on the financial model for its potential stakes in UBS and Citigroup, but believed the two would generate good long-term returns.

GIC, which oversees more than US$100 billion (S$143 billion) of reserves, said 34 per cent of its portfolio was invested in the US, another 35 per cent in Europe and 23 per cent in Asia.

The Americas and Australasia accounted for the remainder. The state investor said 44 per cent of its portfolio was in listed shares, 26 per cent in fixed income and 23 in alternative investments, such as real estate and hedge funds.

The fund also held 7 per cent of its portfolio in cash at the end of March this year, it said in the report.

'GIC's investment objective is to achieve a reasonable rate of return above global inflation with due regard to risks,' said the firm's deputy chairman and executive director, Dr Tony Tan.

Dr Tan said the firm met its investment objective despite global shocks, including the Asian financial crisis a decade ago 'and the ongoing credit turmoil in the international markets'.

The firm said the worst of the financial crisis may not be over, but it would continue to scour for investments in sectors such as the finance industry.

'We should not assume that the worst is over and we continue to be watchful and prudent in our assessment of the economic risks and in our investments,' said Dr Tan.

GIC has recently been active, along with other sovereign wealth funds in Asia and the Middle East, in buying stakes in Western banks.

Traditionally, GIC, which manages the reserves of Singapore's central bank and operates like an institutional fund, buys only minority stakes in companies and avoids taking controlling stakes.

The GIC report will be published annually from now on.

Said Finance Minister Tharman Shanmugaratnam in a statement: 'The report will raise the understanding of GIC as a professional investment company with the singular objective of generating sustainable financial returns over the long term.'