Temasek warns of investment volatility Temasek, the Singapore government's investment arm, warned of "significant contingent risk" facing Europe but highlighted energy and natural resources as one of the few investment bright spots as it reported an almost 16 per cent fall in annual net profit. Song Hwee Chia, head of strategy, said on Thursday that "heightened volatility will be the mainstay of the investment landscape" this year, singling out risks in Europe as it grapples with the eurozone crisis. "We believe that the contingent risk of Europe is probably significant so we will be very cautious in terms of investment opportunities there," Mr Chia said as Temasek disclosed its annual figures. The fund, founded in 1974, said its portfolio grew to a record S$198bn, from S$193bn the previous year. It made $22bn in new investments last year, and divested $15bn. But net profit fell to $10.7bn, from $12.7bn, as some of the largest companies in its portfolio - 30 per cent of which are in Singapore - reported weaker earnings. They included Singapore Airlines and Neptune Orient Lines, a shipping company. Its key measure of performance - total shareholder return - fell to 1.5 per cent from 4.6 per cent last year. Operating cash flow fell $16.8bn from $20.1bn last year. The fund has spent the last decade expanding from Singapore, which today accounts for 30 per cent of total investments, into Asia, which now represents a further 42 per cent of its portfolio. Temasek was still looking for opportunities among European companies with significant Asian businesses. "We keep track of that," Mr Chia said. But a bigger focus was likely to be in energy and natural resources, where Temasek doubled its investments in energy and resources last year to 6 per cent of its total portfolio. Last month it took a 5.5 per cent stake in Ivanhoe Mines of Canada, which has a 66 per cent stake in Mongolia's massive Oyu Tolgoi copper and gold mine. The share of Temasek's portfolio exposed to financial services - its largest single sector - fell to 31 per cent from 36 per cent. The fund, which sold out of its investment in Merrill Lynch at the trough of the market in February 2009, has avoided investing in financial services in the developed world in the last few years. At a conference in Hong Kong last month, Greg Curl, a senior executive at Temasek, warned of "political and regulatory ambiguity in the US" and noted that shareholders in US banks face dilution of uncertain magnitude. In the past two years, Temasek has become a far more proactive investor. Part of the profits Temasek made last year came from trading in the shares of Chinese banks. Executives say Temasek still has faith in China, though renminbi assets at Temasek represent less than 2 per cent of its total portfolio. "Financial services is the best proxy for the underlying economy so therefore we have a large part of our portfolio in it," Mr Chia said. He denied that Temasek had a short-term view on Chinese banks. We continue to believe in the long term growth prospects of China. However, from time to time to meet our investment objectives we will rebalance our portfolio. There has not actually been much movement in our overall exposure to Chinese banks.