China Investment Corporation (CIC) intends to keep seeking out Belt and Road-linked infrastructure investments and add other alternative allocations, amid increasingly uncertain global economic conditions, according to its president.
“Infrastructure is a very important investment area for CIC. Infrastructure needs long-term, stable and huge amounts of funding. This matches [the characteristics of] large institutional investors like CIC, so it’s a relatively more important investment direction for CIC,” Tu Guangshao, vice chairman and president at CIC, said at the Asian Financial Forum held in Hong Kong on Monday.
The $921 billion sovereign wealth fund (SWF) generally makes infrastructure investments purely to seek good returns (as opposed seeking to play any role in overseeing and directing the underlying project or company). CIC has been targeting Belt and Road-linked investments for some time, but when doing so it mainly teams up with local partners or industrial investors to participate Belt and Road-linked investments.
Tu hinted that CIC will not blindly follow China’s national political agenda when making Belt and Road investments. He stressed that CIC is a “commercial” and “market-oriented” investor, while the Belt and Road Initiative is widely perceived as part of President Xi Jinping’s efforts to increase China’s political influence by strengthening regional cooperation and connectivity.
Other asset owners have been leery of getting too heavily involved in Belt and Road projects, over concerns that its objectives are more political than financial in nature.
"We want to understand what's going on but the Belt and Road projects tend to be government initiatives," a senior investment executive at an international pension fund told AsianInvestor. "We tend to not engage in government initiatives of that magnitude where we have no presence or little interest in being present."
CIC has been a fairly heavy investor into alternatives. The SWF said the asset class, which it defines as containing hedge funds, multi-asset investments, direct investments, private equity, resources and commodities, real estate and infrastructure, accounted for two-fifths of its portfolio in 2017, without giving a detailed breakdown. That sits second only to listed shares (at 43.6%).
It typically makes alternative investments in three ways: through alternative investment funds, co-investments and direct investments. The latter tend to provide the highest return but they also require more expertise, while co-investments offer better value for money, a senior executive at CIC who declined to be named, told AsianInvestor.
Its alternatives exposure has been gradually rising, as part of a long-term plan. In October 2017 CIC’s executive vice president Guo Xiangjun said it wanted to increase its exposure to alternatives from around a third of its total allocation to more than half over the next decade, as it seeks to diversify its portfolio from traditional assets and boost returns.
Raising the alternatives allocation has taken a relatively long time, given that private markets lack good asset liquidity, said the unnamed executive. He noted that investors have to wait for good opportunities as they cannot exit such investments easily.
The coming year also offers some challenges, given the likelihood of ongoing market volatility amid economic risks and geopolitical risks. CIC posted a record-high 17.59% return for its overseas investment portfolio for 2017, compared with a 6.22% return in 2016. But the return in 2018 is likely to be much lower; Tu noted that last year was much more difficult for investors.
Still, the unnamed executive said the tougher conditions would not derail CIC's alternative investment aims.
“Long-term developments, instead of short-term risks, are more relevant for alternative investments. The cycles for these investments are long. They are different from [securities in] the open market,” he said.
Speaking at the event, Tu argued that SWFs are playing increasingly important roles in more volatile times.
He noted that major economies have implemented rising protectionism and shifted their monetary policies, which has caused total cross-border investments and foreign direct investments to decline. Capital outflow from emerging markets have accelerated and investment fund flows are less predictable, making it harder to identify investment opportunities.
However, Tu argued that this meant SWFs have a growing importance in driving global investments. These institutional investors have over $7 trillion in combined assets, double the level they enjoyed 10 years ago. Plus they have long-term investment horizons, stable allocations and they seek long-term assets, he said.