China Investment Corp., created to manage part of the nation’s $3.5 trillion of foreign-currency reserves, reported a 10.6 percent return on its overseas investments last year as global equities rallied.
Net income at the $575 billion sovereign wealth fund, which also holds the government’s stakes in China’s biggest banks, rose to $77.4 billion from $48.4 billion in 2011, Beijing-based CIC said in its annual report yesterday. Its overseas investment returns compared with a 4.3 percent loss in 2011 amid declines in global commodity prices.
CIC, which this month named Ding Xuedong chairman, has sought to burnish its performance as the fund makes the case for more money to be placed under its management. That comes as the State Administration of Foreign Exchange, the agency overseeing day-to-day management of China’s reserves, has begun diversifying away from U.S. Treasurys and seeking investments in assets from equities to property.
“That was a relatively big number for a single year,” Li Jie, head of the foreign-exchange-reserve-research center at the Central University of Finance and Economics in Beijing, said of CIC’s overseas return before the announcement. The withdrawal of monetary stimulus by the U.S. “may have a little bit of impact on CIC’s short-term returns due to the pressure on asset prices, but it won’t change CIC’s long-term investment behavior.”
CIC President Gao Xiqing told the official Xinhua News Agency last month that the sovereign fund’s 2012 overseas return had been about 11 percent. Gao said the fund had proven that a diversified investment approach was better than solely buying Treasurys and that CIC was able to manage more money because it had yet to reach an optimal size.
The MSCI World Index jumped 13 percent last year as efforts by global central banks to spur growth boosted equities, helping then CIC Chairman Lou Jiwei reverse losses before he became the nation’s finance minister in March.
The fund “built up” positions in public equities with its new capital last year, and boosted real estate, infrastructure, agriculture and other assets, generating steady returns in its long-term portfolio and producing “good results,” according to the report. It also conducted a review of all direct investment projects and exited some private-equity investments, it said without providing details.
CIC set up unit China Investment Corporation International Co. in 2011 to manage its overseas investments. The unit had received about $49 billion of capital from the government since then, according to yesterday’s report. CIC used up almost all its initial $200 billion in 2010.
Ding, 53, a former deputy finance minister, moved from the State Council, where he was a deputy secretary-general, to take over the running of the fund after Lou was appointed to new Premier Li Keqiang’s government.
“Going forward, the subdued global economic recovery, compounded by rising protectionism, will cast a prolonged shadow over the outlooks of global financial markets,” Ding said in the report. “As major developed economies embark on tapering their quantitative easing programs, volatility of global financial markets will be further increased, creating new challenges for institutional investors.”
CIC achieved 5.02 percent in annualized return on its overseas investments through 2012, the company said in the report. That was “above the medium level” among sovereign wealth funds and reached a target set by its board, Xinhua News Agency reported last month, citing Gao, the fund’s president. The performance compares to the 8.3 percent return the nation’s 1.1 trillion yuan ($179 billion) pension fund, which mainly invests in domestic markets, delivered since its creation in 2000.
Temasek Holdings Pte, Singapore’s state-owned investment company, said July 4 that assets rose to a record S$215 billion ($170 billion) in the year ended March as surging stock markets drove an almost sixfold increase in returns. Total shareholder return, which includes dividends, widened to 8.9 percent from 1.5 percent in the previous year.
The U.S. accounted for 49.2 percent of CIC’s diversified equity investments as of Dec. 31, while emerging markets made up 23 percent, the report showed. Financials made up 22.3 percent of such holdings, up from 19 percent in 2011.
Public equities rose by 7 percentage points last year to 32 percent of its overseas portfolio, while fixed-income securities fell to 19.1 percent from 21 percent, CIC said. Absolute-return investments rose to 12.7 percent.
The fund last year decided to base its asset allocation on the model of endowment funds after reviewing experiences of institutional investors, it said without elaborating. The company also chose to build a “mid-term policy portfolio” to improve stability and flexibility of its holdings, adding a new aspect to its asset management framework that also includes “strategic” and “tactical” allocations, according to the report.
The fund, created in 2007 with an initial $200 billion from the Ministry of Finance, had $22.3 billion in cash and bank deposits as of Dec. 31, up from $20.1 billion in the year earlier, according to the report.
The sovereign fund may find it more difficult to obtain funds going forward as slowing economic growth in China eases concerns about rapid accumulation of reserves and raises the prospect of declines in the holdings.
SAFE, as the central bank agency managing most of the nation’s $3.5 trillion in foreign reserves is known, announced in January a new office to deliver on a government mandate for more “innovative” use of the holdings, as it looks to invest in riskier asset classes that CIC was tasked with.
“After five years of experiment, it’s now possible to see whether what was expected from CIC is actually achievable,” said Li. “Going forward, CIC’s future may be replaced by part of SAFE’s funds.”
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