UPDATE 3-Wealth fund GIC's assets recover, eyes emerging mkts

* Portfolio shrank more than 20 pct in year to March

* Recovers half of last year's losses in recent mkt rally

* Has cut bond holdings, favours emerging mkts

* US forms 38 pct of GIC assets; still has loss on UBS stake

* Lifts alternative investments exposure to 30 pct vs 23 pct (Adds analyst quotes, comparison with other funds)

By Kevin Lim and Neil Chatterjee

SINGAPORE, Sept 29 (Reuters) - Singapore's GIC, the world's fourth-biggest sovereign wealth fund, is ready to use its bigger cash pile to buy into emerging markets and alternative investments such as real estate and natural resources, but warned that bonds may not be safe due to inflation risks.

The strategy of the Government of Singapore Investment Corp, the larger of the city-state's two wealth funds with an estimated $200 billion or more, appears to be evolving as it cut its equity and bond holdings to increase its exposure to alternatives such as property and resources.

Sovereign funds were badly hit by the meltdown in global financial markets after bold investments in Western banks, and GIC fared worse than its new Chinese rival CIC, but outperformed fellow Singapore fund Temasek [TEM.UL].

"The government is not going to be overly upset with one year of slippage in performance," said David Cohen, director of Asian economic forecasting at Action Economics in Singapore.

"They will maintain their diversified portfolio ... Any change in assets will be on the margins."

GIC's portfolio shrank by more than a fifth in the year to end-March, but has recouped over half its losses since then. It pared its equities exposure before the crisis and then profited from a well timed sale of part of its Citigroup (C.N) holding.

For a Graphic on GIC's portfolio, click: here

The Singapore fund's second annual report showed it held 8 percent cash as of end-March, up from 7 percent a year earlier, and it appears keen to put the money to use soon.

"In normal circumstances, we should not be holding cash, particularly now when cash earns you close to zero interest," Chief Investment Officer Ng Kok Song said in a statement accompanying the report.

Ng, who said the fund held up to 10 percent cash at one point, warned of rising inflation as Western governments and central banks face constraints in an era of high unemployment that may prevent them from unwinding stimulus measures.

Mike Kerley, a fund manager at Henderson Global Investors, which manages 53 billion pounds in assets, said the jury was still out on prospects for bonds and inflation, but agreed emerging Asia offered better growth prospects.

"The worst-case scenario would be deflation in the West and inflation in emerging markets," Kerley said.

LOSS ON UBS

GIC's 2008/09 performance and subsequent recovery resemble that of Temasek, which said earlier this month its portfolio slumped S$55 billion, or by around 30 percent, to March before recouping most of its losses. [ID:nSP379316]

Both wealth funds unusually gave more recent performance figures, a move to gain more favourable publicity after coming under fire from Singaporeans worried about the nation's savings.

GIC manages Singapore's foreign currency reserves. Singapore tapped government reserves for the first time this year to help fund a stimulus package as it suffered from its worst recession.

GIC, headed by former prime minister Lee Kuan Yew, ranks behind the sovereign funds of Abu Dhabi, Saudi Arabia and Norway, according to Deutsche Bank.

Sovereign funds around the world manage about $3 trillion.

For NEWSMAKER on GIC manager Tony Tan, click [ID:nSIN420691]

GIC's performance in the year to end-March was roughly in line with Norway's wealth fund, which reported an annualised loss of 22.6 percent on its portfolio in international currency terms.

China Investment Corp (CIC) said it lost 2.1 percent on its global investment portfolio in 2008, while the Yale and Harvard endowment funds shed about a quarter of their value in the 12 months to end-June.

GIC said its investment in UBS (UBSN.VX) is still showing a loss. Earlier this month, it said it made a $1.6 billion profit from halving its stake in Citigroup. [ID:nSP499683]

"While both banks still face challenges in returning to profitability, we maintain our confidence in their long-term prospects," Ng said in the report.

GIC doesn't declare the size of its assets or list its top holdings.

For a FACTBOX on GIC, click [ID:nSIN485514]

Jan Randolph, an analyst from IHS Global Insight, said for sovereign funds, investing in the banking system posed extra and potentially unnecessary risks.

"Once bitten, twice shy," Randolph said.

"Other investments, like in the resources sector, prize industrials and even property, make greater sense at the moment." (Additional reporting by Saeed Azhar; Editing by Muralikumar Anantharaman)