Sovereign wealth funds such as China Investment Corp CIC.UL are struggling to deliver decent shareholder returns at a time when the European debt crisis and an anemic U.S. economy are depressing capital markets from Brazil to Hong Kong. But beaten-down valuations have presented opportunities to investors such as Mexican tycoon Carlos Slim, who recently added European companies to his telecommunications empire.

Temasek's portfolio grew around 2.6 percent in the year ended March to S$198 billion ($156.37 billion), the company, whose assets are mainly in Asia, said in its latest report released on Thursday.

But net profit fell because of a tougher business environment for firms such as Singapore Airlines (SIAL.SI) and Neptune Orient Lines (NEPS.SI), in which Temasek holds stakes. MSCI's broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS declined 10.4 percent in the year ended March.

Temasek, headed by Ho Ching, the wife of Singapore's prime minister, said in the report that resources and energy accounted for 6 percent of its portfolio as of the end of March, up from 3 percent a year earlier.

In the 12 months ended March, Temasek invested S$2 billion in U.S. shale company FTS International and S$1.3 billion in fertilizer firm Mosaic Co (MOS.N). The firm also bought convertible shares of Chesapeake Energy (CHK.N), whose stock tumbled more than 30 percent in the last financial year.

"We will continue to look for opportunities in energy and resources," Chia Song Hwee, Temasek's head of strategy, told a media briefing.

Chia said there was significant contagion risk from Europe as the euro zone debt crisis heads towards its fourth year. But he said this would create opportunities to invest in companies that have exposure to Asia.

The sovereign investor said 72 percent of its portfolio was in Asia as of end-March, compared with 77 percent a year ago. Temasek's exposure to Europe and North America increased to 11 percent from 8 percent.

The Singapore fund held a net cash position at the end of March and had the financial flexibility to do deals, Chief Investment Officer Tan Chong Lee said at the briefing without elaborating.

Temasek's so-called Wealth Added, which it uses to determine the bonus pool, fell S$12.6 billion below its internal target. That was the fourth time it has dropped in the last five financial years, which will affect staff compensation.

The state investor has struggled to exceed the target since 2008 when it was burned by its exposure to European and U.S. banks because of the turmoil in global markets.

SHAREHOLDER RETURNS

Group net profit fell to S$10.7 billion from S$12.7 billion a year earlier, Temasek said.

Total shareholder returns dropped to 1.5 percent from 4.6 percent a year earlier. By comparison, Norway's $600 billion sovereign wealth fund said returns stood at 2.28 percent in international currency terms for the 12 months to March 31.

"They look reasonable, especially in the context of equity markets in recent years. The ability to do private equity-type investments could help boost future returns," said Mark Matthews, Asia head of research for Julius Baer.

"Having Singapore 'crown jewels' like the rig builders and getting stable yield from SingTel helps," he said.

In the current fiscal year, the sovereign investor has started to adjust its portfolio. Temasek paid $2.3 billion in April for a share of Industrial and Commercial Bank of China (1398.HK), the country's biggest bank. In May, it pared down stakes in China Construction Bank (601939.SS) and Bank of China (601988.SS).

Temasek views investment in Chinese banks as long-term proxies to the broader growing Chinese economy and its expanding middle class population, according to the report.

The fund is also planning to swap a 67 percent stake in Bank Danamon for an enlarged share of Singapore's biggest lender DBS Group (DBSM.SI), a deal awaiting regulatory approval in Indonesia.

Temasek, surpassed in size locally only by the Government of Singapore Investment Corp, earlier this year hired former UBS (UBSN.VX) Chief Financial Officer John Cryan to oversee its strategy for Europe, where the state investor has limited exposure.

Cryan was the most high-profile hire by the firm, raising speculation that Temasek is eyeing distressed assets in the euro zone.

"Europe is in a crisis and the best time to buy things are when there is a crisis," Julius Baer's Matthews said. "If you look at many of these European markets, they have really collapsed. I would definitely be shopping around for assets in Greece and Spain." ($1 = 1.2663 Singapore dollars)

(Additional reporting by John O'Callaghan, Kevin Lim and Charmian Kok; Editing by Ryan Woo)

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