Double-digit returns helped boost China Investment Corporation’s (CIC) assets by 19% last year over 2011, which appears to be the result of an opportune shift into developed-market equities and a move out of cash.

Last year, China's sovereign wealth fund's assets grew to $575 billion from $482 billion on returns of 10.6%, a marked improvement over a -4.3% loss in 2011, according to its annual report. Since inception, its annualised return is 5.02%.

Most notable from the report, released on Friday, was CIC's increased allocation to third-party managers. In 2012, 63.8% of its assets were managed by external managers, up from 57% in 2011 and the highest level since the fund's inception in 2008.

CIC cut cash holdings to 3.8% from 11% and raised total public equity exposure to 32% from 25%. Most of its equity allocations were to the US, which climbed to 49.2% from 43.8% of that exposure. Non-US advanced economies accounted for 27.8%, while emerging-market equities made up 23%.

Although CIC has pledged to increase its investments in private equity, its long-term portfolio – which includes private equity, property and other alternatives – remained relatively flat year-on-year (32.4% in 2012 versus 31% in 2011).

Direct investments included Thames Water (£276 million ($424.6 million); EP Energy ($300 million); Polyus Gold ($425 million); Eutelsat Communications (€386 million); Heathrow Airport Holdings (£450 million); and the Moscow Exchange ($187 million).

Some 22.3% of CIC’s equity exposure was in financial stocks, up from 19% the year before, while energy allocations fell to 10.2% from 14%.

CIC’s leaders have said numerous times that their eventual goal is to manage private equity assets in-house with a partner, which makes their reliance on external managers last year "striking", says Shanghai-based consultancy Z-Ben Advisors.

Z-Ben analysts reckon that a shortage of cash and talent are likely reasons why the sovereign wealth fund raised investment into external funds last year – as opposed to a "managerial change of heart".

"CIC has, despite repeated efforts, been unable to secure a reliable funding mechanism from [China's] State Council," Z-Ben says, adding that the funding mechanism, when implemented, will likely be a direct transfer of Safe's assets to the CIC.

"As a consequence, CIC has used up the majority of its cash reserves and any dividend cheques coming in from global holdings to fund its additional exposures," adds Z-Ben. "Without a firmer financial footing, CIC may feel unwilling to commit the time and expensive resources necessary to staff and maintain a regional or global direct-investing presence larger than the one it already operates."

While the CIC touts its low turnover rate and maintains it is an "employer of choice for many talented professionals returning from overseas", it highlighted for the second time in a report the possibility of "differentiated remuneration".

As global private equity players turn their focus to Asia, "it would not be surprising to learn that CIC has encountered more difficulties than it expected in luring top-end talent", Z-Ben says.

External funds will likely see more inflows in the near term, although the consultancy expects CIC to deploy funds into low- and mid-risk holdings while it begins what will likely be a year-and-a-half process of building out its direct investment capacity. Z-Ben also expects CIC to opt for existing partners, with a smaller proportion offered to new managers in the near future.

Once its internal build-out is complete, CIC will undoubtedly treat managers "as ATMs, making withdrawals in size whenever a new internal fund is launched or a megadollar investment opportunity uncovered". Z-Ben forecasts that, in the next five years, external managers will experience "sporadic growth followed by sporadic draw-downs".

Ultimately, it will be a challenging few years for investors, says newly appointed CIC chairman Ding Xuedong.

"The subdued global economic recovery, compounded by rising protectionism, will cast a prolonged shadow over the outlook of global financial markets," he notes. "And 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."