Sovereign wealth funds, with their long reporting time, tend to put out annual reports that reflect the rear-view mirror rather than the present reality. With China Investment Corporation, it looks more like ancient history.
CIC’s annual report is always a long way in arrears of its own numbers, usually seven months or so, but this time it took until September 25, 2020 for the Chinese sovereign fund to announce its numbers for the year to December 31, 2019. The result is like discovering a faded postcard from another time.
CIC reported a 17.4% return on its overseas investments in 2019, driven by a rally in global equity markets. As an overall institution – CIC has an odd subsidiary called Central Huijin that holds the country’s remaining stakes in the state banks, which don’t appear in the investment performance numbers but do appear in the profits – it recorded a 70% increase in net income, to $110.3 billion.
Ah, those were the days: when markets went steadily and predictably up, nobody had ever heard of Covid-19 and we all used to get on aircraft. Unlike the recent Temasek reports, this is perhaps a historical curiosity rather than a document that tells us much about the pandemic response from the largest institution in the country where that pandemic started. But what can we learn from the report?
CIC has now crossed $1 trillion in assets, making it almost certainly among the top three sovereign funds in the world
First, that CIC has now crossed $1 trillion in assets, making it almost certainly among the top three sovereign funds in the world, along with the Abu Dhabi Investment Authority and the Norwegian fund, Government Pension Fund Global. It has reached this summit largely by capital injection, but it’s also done quite a good job: the annualized cumulative 10-year net return, at 6.6%, is well above that of, say, Singapore’s GIC, at 5.2%.
Second, CIC remains among the funds most committed to alternative assets. The proportion of the fund invested in hedge funds, private equity, real estate, infrastructure and so forth actually fell in 2019 over the previous year, from 44.1% to 42.2%, but that is still much the largest allocation in the fund (versus 38.9% public equity, 17.7% fixed income and a strikingly low 1.2% cash products). Sovereign wealth funds do tend to be avid purveyors of alternative products – it’s a characteristic you see at Australia’s Future Fund, at ADIA and at GIC, among others – but CIC is particularly committed. Long term, it wants to get non-public market investments, chiefly alternatives and direct investments, up to 50% of the portfolio.
Third, no matter what has happened in the geopolitical arena, by the end of 2019, CIC was actually increasing the proportion of its holdings in the US. Things have obviously soured since, but when last disclosed, the US accounted for 55.2% of the public equity portfolio, up from 53.5% a year earlier, although at least some of that would be through market performance. Emerging market equities account for only 12.1% of the portfolio, perhaps surprising for a market that is a major agent of change for those economies.
We can also see that, in 2019, information technology stocks replaced financials as the largest sector in the equity portfolios; not a surprise, and in line with both mainstream investment thinking and market performance. That will have helped the fund when Covid kicked in.
Lines of defence
One other key piece of data, of particular interest to the investment management industry, is the proportion of the fund that is managed internally. Since inception – and this is common with relatively new sovereign funds – the trend has been to start with much of the portfolio externally managed, then to bring the management back in-house as internal capability grows. At the end of 2018, 57.9% of the fund was externally managed. By the end of 2019, it was 52.2%.
It will be interesting to see if this trend has survived a series of major staff departures over the last few months. In particular, Susan Gao, who built the proprietary equity team at CIC after moving there from Wellington Management in 2009, departed in April 2020, following Wallace Yu, who headed the multi-asset team. Other departures have included Roslyn Zhang, who led hedge fund allocations, and Zhang Qing and Meng Chen, both senior figures in the direct investments team.
Departures like these have consequences: Bloomberg has reported that after Gao went, 60% of one of the largest actively managed equity portfolios – the Global Large Cap Value Equity Portfolio, which managed more than $10 billion – was transferred to passive strategies.
And this is where we find ourselves catching up with 2020: in the 10 months since the year-end this annual report reflects, it is understood that CIC has sought to bolster itself against Covid and worsening US-China tensions by shifting to a focus on resilience rather than opportunism. Apart from passive equity strategies, this is also thought to mean more investment in credit markets, increased holdings in healthcare and tech, and increased exposure in Asia.
Although the annual report’s numbers don’t cover the Covid era, its written summaries sometimes do; the fund talks about the efforts it has made to enhance liquidity management, for example, and it talks about the “three lines of defence” that all its investment departments have to observe, which are mainly about monitoring and risk management. But we’re going to have to wait another year to see what Covid did to performance and allocations.
One can always count on the Chinese to have a proverb for any occasion, and chairman and CEO Peng Chun wheeled out this one: “In a wind-torn valley, a pine tree may bend. But when the storm has passed, it will stand proud and thrive.” That’s probably true. But it’s going to be a long storm, and even when it’s passed, we’re going to need to wait the best part of a year to find out what it did to the tree.
