China’s sovereign wealth fund said it will invest with a longer-term focus after it posted a 4.3 percent loss on its overseas holdings last year because of declines in global commodity prices.
Net income at the $482.2 billion fund, with a resources- heavy portfolio, fell to $48.4 billion in the year ended Dec. 31, Beijing-based China Investment Corp. said in its annual report released yesterday on its website. The overseas investment performance was the worst since the fund was set up in 2007, and compares with an 11.7 percent return in 2010.
The MSCI World Index (MXWO) tumbled 7.6 percent last year as the European debt crisis hampered growth prospects and sapped demand for commodities, driving down the value of state-owned investment companies’ holdings. CIC Chairman Lou Jiwei, who deployed almost all the fund’s cash as the global economy was improving, is focusing on longer-term returns after market volatility in 2011 reached the highest level since the 2008-2009 global financial crisis.
“They’re very clear that they have shifted their return time horizon to 10 years, and that comes up two or three times in the annual report,” Victoria Barbary, a senior researcher of sovereign investment at Milan’s Bocconi University, said by telephone from London. “They’re not looking at this year’s returns. It doesn’t matter what this year’s return is as long as their annualized return over a 10-year period is positive.”
CIC was set up to improve returns on foreign-exchange reserves by investing overseas. In China, the fund’s holdings are largely limited to stakes in financial institutions for the government.
Temasek Holdings Pte, Singapore’s state-owned investment company, said earlier this month that profit for the year to March 31 declined 16 percent as contributions from units fell amid the global slowdown, while total shareholder return narrowed to 1.5 percent from 4.6 percent in the previous year.
Long-term holdings accounted for 31 percent of CIC’s overseas portfolio as of Dec. 31, while public equities made up 25 percent and fixed-income securities 21 percent, according to the report that didn’t provide year-earlier comparisons.
“In 2011, we calibrated our asset allocation to better reflect the longer investment horizon and to enhance the flexibility of our investment portfolios,” Lou said in the annual report.
CIC boosted private-equity positions and expanded real estate holdings to pursue stable asset returns last year, while continuing to make direct investments in oil and gas, mining and infrastructure, according to the report.
“They’ve moved quite heavily into private markets and commodities,” Barbary said. “In the private-equity space, which they’ve only been investing in for two years or so, you have the old hockey stick effect: it declines in value to start with and it grows in value before realization. And they’re still in that downward curve in the hockey stick.”
The fund held 62 percent of its so-called diversified fixed-income investments in government bonds, and 21 percent in corporate debt, it said.
While CIC’s equity investments suffered losses as global markets plunged, its bond and credit product holdings generated “relatively good returns,” CIC said, without providing details. Most of its investment portfolios achieved positive returns and outperformed relevant benchmarks, it added.
Equities fell 9 percent to $59.7 billion as of Dec. 31, while fixed-income securities increased to $38.6 billion, CIC said. Alternative investments expanded 38 percent to $40.5 billion, it said without elaborating.
The fund in September set up China Investment Corporation International Co. to manage its overseas investments, Lou said in the annual report. In December 2011, $30 billion was injected into CIC International to enhance its role as a vehicle to diversify China’s foreign-exchange holdings, he said.
CIC fully deployed its investible capital in 2011, according to the report.
With global economic growth expected to pick up in the rest of the year and into next year, “now is a good time to make new investments, especially after they’ve got all that new money,” Zhao Qingming, a senior analyst in Beijing at China Construction Bank Corp., said ahead of CIC’s release.
CIC holds stakes in China’s biggest banks through unit Central Huijin Investment Ltd., which contributes to the fund’s profit.
Investment income from long-term equity holdings rose 31 percent last year to $53.4 billion, while the company recorded $11.4 billion in unrealized losses from fair-value changes, reversing a $9.8 billion gain in 2010, according to the report.
The fund, created with an initial $200 billion from the Ministry of Finance, has cash holdings of $20.1 billion in 2011, up from $14.5 billion in the year earlier, according to the report.
CIC is ranked the world’s fifth-largest state-owned investment entity after funds in the Middle East, Norway and China’s State Administration of Foreign Exchange, or SAFE, according to the Sovereign Wealth Fund Institute.
Noble Group Ltd., the Hong Kong-based owner of mines and farms and trader of commodities from aluminum to zinc in which CIC bought a 15 percent stake in 2009, fell 48 percent in Singapore trading last year. The global depository receipts of JSC KazMunaiGas Exploration Production, the London-traded unit of Kazakhstan’s state-run energy company that sold a $939 million stake to CIC in September 2009, tumbled 25 percent last year. KazMunaiGas rallied 23 percent so far this year.
Teck Resources Ltd. (TCK/B), the world’s second-largest exporter of metallurgical coal in which CIC bought a $1.5 billion stake in 2009, slumped 42 percent last year in Toronto trading. Teck Resources contributed to CIC’s 11.7 percent global investment returns in 2010 when the stock surged 68 percent.
The Thomson Reuters/Jefferies CRB Index (CRY) of raw materials dropped 8.3 percent in 2011, while the Bloomberg World Coal Index plummeted 21 percent.
Natural resources are the most important part of CIC’s direct investments as they are “the most important growth element in China’s economic expansion,” Guo Xiangjun, CIC’s chief risk officer, told a conference in Beijing on July 17.
North America was the biggest market for CIC’s diversified equity portfolio, accounting for 43.8 percent, followed by the Asia-Pacific region with 29.6 percent. Nineteen percent of such stock holdings were in financials, while energy accounted for 14 percent, according to the report. Diversified holdings made up 80 percent of the fund’s overseas investments.
CIC doesn’t want to buy any European government bonds on concerns of the debt crisis, although it’s still looking for opportunities in the region, President Gao Xiqing said in an interview in Addis Ababa, Ethiopia, in May.
“Looking ahead, the global economy will continue to recover, but the process will be fragile,” Lou said in the annual report, adding that CIC will take a “prudent” stance “with fresh volatilities in the financial markets still posing serious risks.”
--Zhang Dingmin. With assistance from Sanat Vallikappen in Singapore. Editors: Andreea Papuc, Linus Chua
To contact the Bloomberg News staff for this story: Zhang Dingmin in Beijing at Dzhang14@bloomberg.net
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