China's sovereign wealth fund is likely to continue seeking out opportunities in alternative assets even as the alternatives space becomes more crowded and the investment climate becomes more difficult amid heightened trade tensions.

In its latest annual report published on Monday, the $941 billion China Investment Corporation (CIC) said that it plans to steadily expand alternatives and direct investments as signature components of its portfolio.

The Beijing-headquartered sovereign wealth fund (SWF) had nearly 40% of its assets allocated to alternatives investments such as private equity and infrastructure at the end of last year -- second only to listed shares.

And CIC’s executive vice president Guo Xiangjun has previously said that it would like to increase its exposure to alternatives from around a third of its total allocation to more than half over the next decade.

Headwinds are gathering that could yet complicate the execution of that goal.

The CIC annual report highlighted a move to strengthen the China-US trade investment relationship. CIC and Goldman Sachs signed a memorandum of understanding in November 2017 to establish the China-US Industrial Cooperation Fund, which aims to invest $5 billion in American companies closely linked to China in the manufacturing, industrial, consumer, and healthcare spheres.

Whether those specific plans are nudged off course by the growing US-China trade dispute and the rising barriers to foreign investment is an open question.

But on the whole China's alts investment drive is likely to continue, believes Barry Tong, a partner in global advisory firm Grant Thornton.

CIC will be more prudent about investing into the US; it and other state-owned enterprises will have to take greater consideration of political factors and think more about the potential risk when they exit their investments in the future, he told AsianInvestor.

However, CIC has a very global portfolio – it can still go to South America or Europe to look for opportunities there, Tong said.

It can also feed off the infrastructure investment opportunities thrown up by the Chinese state's gargantuan Belt and Road Initiative. CIC said in the report that it aligned its investments with the initiative when seeking outbound investments in 2017. 

ASSET ALLOCATION

CIC was established in 2007 to diversify China’s foreign exchange holdings. Its three subsidiaries are CIC International, CIC Capital Corporation and Central Huijin Investment. Overseas investments are undertaken by CIC International and CIC Capital, while Central Huijin undertakes equity investments in key state-owned financial institutions in China.

For 2017 it posted a record-high 17.59% return for its overseas investment portfolio, compared with a 6.22% return in 2016.

 
 

Alternative assets – including hedge funds, multi-asset investments, direct investments, private equity, resources and commodities, real estate and infrastructure – accounted for two-fifths of the portfolio in 2017, the annual reports shows, without giving a detailed breakdown.

Last year, the company approved or signed agreements for 49 private equity, private credit, or real estate projects, although it has not disclosed the amount of capital committed to these projects. CIC Capital also completed investment decisions for 20 projects, with a total committed investment of $3.8 billion in areas ranging from infrastructure to agriculture.

CIC did not immediately respond to AsianInvestor's emailed query about its future asset allocation plans.

The annual report showed that a clear majority of CIC's assets (62.6%) were still externally managed as of end-2017.

But the SWF said in the report that it intended to develop its in-house capabilities for public market investment and direct investment in long-term assets.

Li Keping, the sovereign wealth fund's senior adviser and former chief investment officer, also said, separately, in October that it will strengthen its in-house investment capabilities in light of the relatively limited availability of private market managers.

RETURNS LET-DOWN

CIC’s alternatives push is in line with other SWFs around the world.

Allocations to alternatives among sovereign investors increased globally from an average of 10% in 2013 to about 20% in 2018, according to Invesco’s annual industry study published on Monday.

With the total assets under management (AUM) among sovereign wealth funds and state pension funds growing from $3.2 trillion in 2013 to $9.6 trillion in 2018, that represents a $1.6 trillion increase into alternatives just from sovereigns over a five-year period.

However, some think the more crowded investment market that has resulted will likely make it harder for asset owners to hit their return targets.

Generally, Asian sovereigns are expecting annual returns in the low-to-mid teens at a minimum, Terry Pan, chief executive for greater China, Southeast Asia and Korea for Invesco, told AsianInvestor.

“If you have more money chasing those projects," Pan said, "it’s going to be harder to find things that actually deliver that return."

For more insights on investing in China, AsianInvestor is hosting its 5th China Global Investment Forum in Beijing on September 13. For more details, visit the website or contact us on +852 31751963.