Stock markets can be capricious, and even Temasek Holdings is at their mercy, as the company's latest results show.

Amid a volatile year on global bourses, the Singapore investment company suffered its first portfolio decline since the 2009 global financial crisis, pointing to more tough times ahead. The firm's net portfolio value fell to $242 billion for the financial year ended March 31, down from $266 billion a year ago.

The decline was not surprising - about three-fifths of Temasek's holdings are tied up in listed assets, which means weak stock markets around the world were a significant drag and part of the fall was due to unrealised losses.

Markets everywhere had a roller-coaster year, particularly in China, which made up a quarter of Temasek's portfolio as at March 31.

The global economic outlook remains cloudy, and investors everywhere have faced an uphill battle to find good returns since the global financial crisis.

What does this mean for Temasek's future returns and its long-term investment strategy?

TOUGHER INVESTING ENVIRONMENT

Global growth has been in the doldrums since the financial crisis, with concurrent impact on investor returns. Last month, the World Bank downgraded its global growth forecast for this year to 2.4 per cent, from the 2.9 per cent projected in January.

The United States is grinding through a slow recovery, while China - the world's second largest economy and a key growth driver in Asia - is struggling to manage its transition from export-led growth towards consumption and services.

Central banks all over the world have cut interest rates to rock-bottom levels in a bid to stimulate economies, and this means "safer" assets are producing particularly low returns.

This has pushed investors to search for better returns in riskier markets, for instance in private equity and other alternative investments. "If the current trend of low interest rates becomes a norm, it will be tough for everyone, including pension funds and investors like Temasek," says CIMB Private Bank economist Song Seng Wun.

Temasek is still under pressure to deliver returns amid this challenging investing environment, and its latest results show this has been no easy task.

For the year ended March 31, Temasek missed its own internal target - called the risk-adjusted hurdle rate - of 8 per cent over one year. This goal aggregates minimum rates of return across geographies, sectors and asset classes.

Temasek's total shareholder return came in at negative 9.02 per cent for the year, falling vastly short of that goal. Over a 20-year period, total shareholder return was 6 per cent, also missing the 20-year 9 per cent hurdle rate.

Temasek's returns are important because they represent Singapore's future spending power. They form part of the net investment returns contribution, which the Government uses to supplement its annual Budget spending.

In the years to come, Singapore will need to spend more on its ageing population, rising healthcare needs, and social support for the vulnerable.

One way to fund this is by collecting more taxes either by growing the economy or raising tax rates. Both are difficult to do in today's slow-growth environment where tax competition is intense.

Another way to fund this is by drawing down on financial reserves built from past decades of Budget surpluses.

For Singapore, the preferred option in recent years is to invest past returns and use the returns from those investments to pay for these expenditures. This is more sustainable than drawing down directly on the principal of the reserves. That's where investment returns from Temasek, GIC and the Monetary Authority of Singapore come in. Of the three, Temasek can be described as being the main vehicle for generating "alpha" - outsize returns above what most others in the market can earn - and can, therefore, take on the most risk.

WHAT NEXT FOR TEMASEK?

With global growth slowing and publicly listed firms struggling to generate value, Temasek is taking bets on tech companies to position its portfolio for the long term.

The firm has ramped up investments in the sector to tap trends like the sharing economy and the rise of e-commerce.

Temasek was an early investor in Chinese e-commerce giant Alibaba and raised its stake in the company last month. Alibaba, which went public on the New York Stock Exchange in 2014, now has a market capitalisation of more than US$200 billion (S$270 billion).

Temasek was also among 12 investors that participated in a US$1.5 billion fund-raising round by home rental service Airbnb last year. During its financial year, Temasek also raised its investment in Chinese transportation network company Didi Chuxing, which has been valued at approximately US$28 billion.

Temasek has also made a number of other smaller tech-related investments, such as SoFi and C2FO in the US, Funding Circle in Britain, and BillDesk and Policy Bazaar in India.

Telecommunications, media and technology made up the bulk of its portfolio in the financial year ended March 31, overtaking the financial services sector.

While this was due in part to stock market fluctuations, it also signals a gradual shift in focus.

Temasek will open its second United States office in San Francisco in September, to take advantage of tech-related investment opportunities in Silicon Valley.

This strategy mirrors that of institutional investors elsewhere.

Denmark's two largest pension funds - privately run PFA Asset Management and government-backed ATP - announced earlier this month that they would be pooling resources to invest in emerging sectors. As part of the agreement, PFA will match a 499 million krone (S$100 million) contribution by ATP to a private equity fund that will invest in Nordic technology companies.

It is difficult to tell if Temasek's bets on the tech industry will pay off in the long term.

While these up-and-coming companies have strong growth prospects and have the potential to deliver the level of returns Temasek is after, such investments are riskier than putting money in established listed firms.

The key lies in "calculated risk-taking" and being nimble enough to respond quickly to emerging trends, says Mr Song.

This includes taking advantage of divestment opportunities.

Mr Song points out that Temasek's results for the year ended March 31 could have been worse, if the firm had not taken advantage of a market rally earlier this year to sell some of its holdings.

In the same vein, the recent sale of former Temasek portfolio company Neptune Orient Lines to French shipping giant CMA CGM could help boost numbers in this financial year, he notes. "(They) have to be more opportunistic... (especially) when the global macro landscape can turn very quickly and trends can change rapidly."

This can be tough for a large organisation like Temasek, but there are clear signs in the company's portfolio that change is already afoot. For instance, banks made up almost all of Temasek's exposure to financial services in 2011. The company has since broadened its holdings to include more insurance, payments and financial technology firms, such as digital payment services provider PayPal.

These now make up one-eighth of its financial services portfolio, Temasek said at its annual review.

For now, the public markets are likely to remain Temasek's bread and butter. But unlisted assets - and earlier-stage companies - will likely make up an increasing share of its portfolio in the coming years as the company takes more bets in the fast-growing tech sector.

With the tech investments it has already made, Temasek has stuck with its themes of identifying emerging champions and tapping opportunities related to the growing Asian middle-class. Short-term wobbles aside, these look set to be solid investment fundamentals.