China’s CIC State Fund Says 2013 Returns Decline Amid Volatility

Aug 08, 2014 12:01 pm ET

Aug. 9 (Bloomberg) -- China Investment Corp., the nation’s $653 billion sovereign wealth fund, said return on its overseas investments fell last year as volatility in global financial markets eroded the value of its portfolio and prompted the company to cut bond holdings.

The return dropped to 9.33 percent from 10.6 percent in 2012, according to the Beijing-based company’s 2013 annual report released yesterday. Net income at the fund, which also holds government stakes in China’s biggest banks, rose 12 percent to $86.9 billion, the report showed.

The lower 2013 results add to pressure on Chairman Ding Xuedong to bolster returns in a year when escalating tensions in Ukraine and the Middle East as well as Argentina’s debt default damp global equities. CIC in June vowed to improve how it manages its overseas portfolio after state auditors found dereliction of duty by managers and inadequate due diligence in 12 investments made between 2008 and 2013, leading to losses.

“As uncertainties remain in the course of the global economic recovery, deal sourcing becomes more difficult,” Ding said in the statement. “All international institutional investors face considerable pressure in investment activities and profit generation.”

CIC “fine-tuned” its portfolio, boosting equities and reducing bonds, which “resulted in a preferable outcome,” according to the statement. The company also partially or entirely exited more than 10 direct investments, making good returns, it said without giving details.

More Equities

Net realized gains on investments doubled to $3.95 billion, while fair-value gains fell 20 percent to $9.8 billion, according to the statement.

CIC’s return on overseas investments compared with a 24 percent jump in the MSCI World Index last year.

Public equities, which refer to the stocks of companies traded on exchanges, rose by 8.4 percentage points to 40.4 percent of overseas holdings as of Dec. 31, while fixed-income securities fell by 2.1 percentage points to 17 percent, CIC said. Absolute-return investments, which include hedge funds and “risk parity and multi-asset tactics,” fell to 11.8 percent.

CIC’s return last year was “no doubt helped by a large asset allocation shift into equities and away -- in roughly equal measures -- from absolute return products, direct investments and fixed income holdings,” consulting firm Z-Ben Advisors Ltd. wrote in an e-mailed report.

The U.S. accounted for 46.1 percent of CIC’s public equity investments, compared with 49.2 percent a year earlier, yesterday’s report showed. Financials, the biggest category by industry, made up 22.9 percent of such holdings, up from 22.3 percent.

Longer Term

Long-term assets, which include private equity, infrastructure and real estate, fell to 28.2 percent of the fund’s overseas portfolio, from 32.4 percent a year earlier, a trend that was “somewhat exceptional” for long-term investors that tend to build up assets over time, according to Sven Behrendt, managing director at Geneva-based GeoEconomica, which researches sovereign wealth funds.

“The relative decline might reflect the political risk premium that CIC has to pay in an increasingly politicized investment environment,” Behrendt wrote in e-mailed comments.

The “rise of investment protectionism” will pose new challenges, CIC’s Ding said in the annual report without elaborating.

Audit Report

Temasek Holdings Pte, Singapore’s state investment company, said last month that assets increased 3.7 percent in the year to March, less than half the growth the previous year, as Asia holdings weighed on the performance even as it boosted assets in Europe and the U.S. amid economic recoveries.

CIC’s financial and information management is weak, accounting policies for overseas investments are “not prudent enough,” and it wasn’t strict in enforcing its personnel management and accountability measures, the National Audit Office said June 18, citing results of an audit last year. The fund pledged the next day to fix those problems.

“In public market investments, we improved the selection and evaluation process of external managers, set up regular communication mechanism, and enhanced the objective assessment and adjustment of external managers,” CIC said in the report. “For long-term investments, we searched for good projects actively on one hand, and enhanced post-investment management to improve project quality on the other.”

--With assistance from Klaus Wille in Singapore.