As of March 31, the value of Temasek's investment in Merrill Lynch had fallen by 24 percent and its stake in Barclays was down 38 percent.

You'd think that would hurt the returns for the Singapore sovereign wealth fund. But you'd be wrong.

Temasek's less-than-stellar investments in the banking sector couldn't slow the fund's momentum during the year that ended in March, according to its annual report. Bloomberg reports that the fund's net income doubled during the period to $12.8 billion. The returns comfortably outpaced the fund's average annual return of 18 percent since its inception more than 30 years ago.

The fund's portfolio expanded by 13 percent to $185 billion.

How did it do it? The fund's $3 billion sale of Tuas Power during the period certainly helped. The country's Ministry of Finance also injected about $7 billion into the fund during the year.

Temasek controls six of Singapore's 10 biggest companies, and the city's economy is still expanding at a healthy clip. Bloomberg notes that Singapore's economic output exceeded Merrill Lynch's market value for the first time in the quarter ended in March. It did it again in the June quarter.

Still, with investments in the financial sector comprising 40 percent of Temasek's portfolio, it's hard to imagine the fund can maintain these kinds of returns.

Even so, Temasek officials have indicated they still see value in the battered sector and may go in for even more exposure. "The financial service industry is one we believe in," said Temasek senior managing director Manish Kejriwal. "It's a proxy to the economic growth."

Indeed, Temasek recently committed another $900 million to Merrill Lynch, on top of the $5 billion it injected late last year. The fund uses its size to negotiate terms that reduce its risk in what most would consider the riskiest sector today.

Even though Merrill's share price has dropped precipitously since then, Temasek's stake was made whole when a subsequent share offering triggered an anti-dilution clause and reset Temasek's preferred shares at a lower price.