CIC raises outsourcing, fears for deal-sourcing

China’s sovereign wealth fund increased its allocation to external managers last year and made a move into developed market equities, but expressed concern over the outlook for deal-sourcing.

External firms managed $71.4 billion more of China Investment Corporation’s (CIC) assets at the end of 2013 than at the end of 2012 as it raised its allocations to 67.2%, from 63.8%, over the period.

The news follows reports last week which found that Asian institutional investors will likely increase outsourcing over the next three years following a recent decline in the use of external managers.

Overall, CIC’s assets grew 13.4% last year to $652.7 billion, from $575.5 billion in 2012. Net income increased by 10.8%, or $92.5 billion, and the investment return was 9.33%, down from 2012’s 10.6%. Annualised return since inception in 2007 is 5.7%, according to its annual report released on August 8.

Last year's return was chiefly driven by equities. In 2013, CIC increased its exposure to publicly listed equity to 40.4%, from 32% in 2012, and reduced its allocation to fixed income to 17%, from 19.1%.

“The past year was characterised by multi-speed recoveries across the globe,” said Ding Xuedong, CIC’s chairman and chief executive.

The fund also increased its exposure to emerging market sovereign bonds, which jumped to 26.8% from 17.5%, and slashed its allocation to developed market sovereign debt to 44.1%, from 54.7% previously.

While developed markets expanded, including the EU, Japan and the US, emerging economies slowed due to structural constraints and capital outflows, noted Ding.

CIC increased its exposure to equities in advanced economies (ex-US) to 36.8% in 2013, from 27.8% in 2012, and decreased its allocation to US and emerging market equities to 46.1% and 17.1%, respectively, from 49.2% and 23%.

Looking forwards, Ding expressed concern that deal-sourcing would become more difficult as the global economic recovery was still shaky.

He pointed to challenges arising from protectionism and the complexity of global regulatory supervision. To navigate such difficulties, he said CIC would explore cooperation and co-investment with other funds and the pooling of resources.

CIC also unveiled that it had launched a new risk management and portfolio management system covering the fund’s portfolio structure, underlying investments and product and benchmark libraries.

It incorporates market risk and “what-if” analysis as well as performance calculations, and allows multi-layer monitoring, analysis and management of all asset classes that CIC invests in.

Earlier this year CIC was criticised by the National Audit Office for irregularities in external fund manager selection procedures and inadequate due diligence in certain projects. The fund vowed to improve in response to the official censure.