* Reports annualised 20-year real rate of return of 4.2%
* Ups allocation to private equity to 17% from 15% year ago
* Executives see inflation as medium-term challenge
* GIC increases investments in real estate, infrastructure
* Says has dry powder for new opportunities
By Anshuman Daga and Yantoultra Ngui
SINGAPORE, July 27 (Reuters) - Singapore sovereign wealth fund GIC, one of the world's biggest investors, is bracing for muted investment returns and expects little respite from runaway inflation that has forced central banks around the world to tighten policy.
"Inflation itself is already a problem because we want to generate a return higher than inflation," Lim Chow Kiat, GIC's chief executive, told Reuters in an interview at the fund's 37th-floor office overlooking the financial district.
"Certainly we have to assume that the macro environment remains challenging for the foreseeable future," he said, highlighting rising interest rates and its impact on economies and financial assets, and the knock-on volatility in markets.
GIC is ranked as the world's sixth-biggest sovereign investor with $799 billion in assets, according to research firm Global SWF.
Bigger peers such as Norway's sovereign wealth fund and Japan's Government Pension Investment Fund have also flagged difficult market conditions, citing inflation and geopolitical events.
GIC said it reported an annualised 20-year real rate of return of 4.2% for the year to March versus 4.3% over the same period a year ago. The United States was its biggest market, making up 37% of its portfolio, up from 34% a year ago.
Lim said central banks are likely to further tighten policy, at least in the short term, to fight inflation.
Concerns about runaway inflation have trumped central banks' worries about growth. The U.S. Federal Reserve is likely to hit a key milestone on Wednesday with a rate hike that effectively ends pandemic-era support for the economy.
"The challenge is that we see inflation not just as a near term phenomenon but actually something that will likely be part of the investment environment for the medium term," said Prakash Kannan, GIC's chief economist.
CHINA TECH CRACKDOWN
GIC has been expanding its portfolio with real estate assets focused on office, retail and industrial, as well as other sectors such as data centres and infrastructure.
"Many of the real estate and infrastructure type investments actually have either automatic CPI (consumer price index) riders or an ability to raise rents once the lease ends," said Jeffrey Jaensubhakij, GIC's group chief investment officer.
The fund said it has raised its headcount in its real estate and infrastructure groups by about 35% over the past three years.
Last month, GIC agreed to buy a major stake in Europe-based The Student Hotel, with Dutch pension fund APG in a deal that valued the student accommodation and hotel group at $2.2 billion.
GIC, which counts Alibaba and Meituan among its Chinese investments, said the worst was likely over on a technology regulatory crackdown in the world's second-largest economy.
"In terms of pace and intensity, it shouldn't get any worse. Whether it'll ease or not is a different question but the stocks have fully reflected that," Jaensubhakij said, adding China still offered opportunities for GIC beyond the tech sector.
GIC's portfolio returned 7.7% per annum in nominal U.S. dollar terms over the five years to March 2022, versus 8.8% reported in the same period ending last year.
That compared with an annualised 8.5% return over five years of GIC's reference portfolio of 65% global equities and 35% bonds.
GIC has investments in digital assets and Jaensubhakij said the recent shakeout in the crypto market showed vulnerabilities among the weaker players while the underlying technologies were still promising.
GIC was primed to take advantage of any sharp correction in asset prices in key sectors, he said.
"We've been cautious but that caution actually gives us a little bit of leeway in this kind of environment. It means that we have probably raised some dry powder to be available." (Reporting by Anshuman Daga and Yantoultra Ngui; Editing by Sumeet Chatterjee and Susan Fenton)