CIC eyes more alternatives after negative returns

China's $814 billion sovereign wealth fund grew its AUM last year despite a -2.96% loss on investments. It has heavily cut its emerging market exposure and is focusing more on illiquid assets.
CIC eyes more alternatives after negative returns

China’s sovereign wealth fund (SWF) is to further raise its alternatives allocation in a bid to boost performance in response to portfolio losses in 2015, but expects another tough year for investors.

Despite a 9% rise in assets under management last year to $813.8 billion as December 31, China Investment Corporation’s 2015 investment return was -2.96%, according to its annual report published on Friday.

This marks the fund’s lowest asset growth rate since it launched in 2007, and follows returns of 5.47% and 9.33% in the previous two years, respectively. It is the third time that fund recorded negative annual performance, after 2011’s -4.3% (amid the European debt crisis) and 2008’s -2.1% (thanks to the global financial crisis).

Financial market volatility and foreign exchange losses triggered by the dollar rising against other currencies were the major reasons for the loss, said Ding Xuedong, CIC chairman and chief executive

Moreover, global stocks and commodity prices tumbled last year, added Ding, introducing enormous risks and challenges for global investments. He predicted that institutional investors would find it more difficult to achieve their long-term performance targets amid declining returns and rising volatility.

Ding said 2016 was likely to be another year of sluggish growth and uncertainty, in light of the US’s Federal Reserve’s "fickleness" over rate hiking, Britain’s vote to exit the EU and the high volatility of major currencies.

Other sovereign funds have also been struggling to maintain their historical performance levels.

Abu Dhabi Investment Authority said last week that its 20-year annualised rate of return in dollar terms over the past 20 years had fallen to 6.5% in 2015 from 7.4% the year before, without revealing the actual investment performance for last year. 

Korea Investment Corporation (KIC) posted a negative return of -3% in 2015. In its own annual report in April, the $92 billion SWF cited emerging market volatility and the strong dollar as the main reasons for its investment losses.

In response to headwinds, CIC had reduced its emerging market exposure significantly last year. The fund cut its EM stock allocation from 20.9% to 11.68% of its $386 billion public-listed equity portfolio, and its EM sovereign bond investments from 17.7% to 5.13% of its $118 billion fixed income portfolio. This means it will have benefited less from the rally in EM assets since the Brexit vote on June 23.

Like many other asset owners, CIC increasingly turned to illiquid alternatives, such as real estate and private equity funds exposure last year, but did not reveal the size of the increase in allocation.

The fund set up two separate units for such investments in 2015: one dedicated to large-scale direct real estate investment projects in developed countries, which completed nine projects last year; and CIC Capital Corporation, a subsidiary for overseas direct investment set up in January 2015. 

CIC likes property for its stable cash flows, protection against inflation and relatively high risk-adjusted returns, and now has more than 40 real estate projects in its portfolio. It does not publicise the size of its property allocation.

The fund plans to add real estate exposure and work with with foreign institutional investors and real estate fund managers on co-investments and club deals.

Asset managers point to growing institutional appetite for long-term holdings of prime property , highlighted recently by Qatar Investment Authority’s purchase of Asia Square Tower 1 in Singapore from BlackRock Real Estate, as reported.

Moreover, CIC said it had added private equity funds that generated strong performance last year, without providing specific figures, and that it was looking to form partnerships with a few outstanding PE managers.

In addition, the fund identified private credit as an independent active strategy. This reflects strong institutional demand for this asset class – as well as for multi-asset strategies – said a Hong Kong-based institutional salesman at a fund house.

CIC’s level of investment outsourcing fell slightly last year, with external managers running 66.92% of its overseas portfolio, down from 67.7% in 2014. 

The fund said it aimed to boost its internal capabilities. Two examples of such moves in recent years include its establishing a global large-cap value equity portfolio in 2013 and a risk allocation portfolio in 2011.

In the meantime, there remains uncertainty over who will be CIC’s next chief investment officer. Last month it appointed Tu Guangshao to replace Li Keping as vice-chairman, but left a question mark over the CIO role, previously held by Li. 

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