China Investment Corporation (CIC) has slowed down its alternative investments in 2019 and may not be able to lift the allocation of the asset class to 50% by 2022, as it had been planning. 
 
The sovereign wealth fund reported strong results in its latest annual report released last Friday (September 25). Its overseas investments enjoyed a strong net annual return of 17.41% at the end of 2019, with investment income of $42.2 billion. That performance was far better than the -2.35% CIC had recorded the previous year. CIC's overall global investment portfolio rose to $345.31 billion. 
 
However, CIC saw alternative assets drop to 42.2% of its global portfolio, down from 44.1% in the year before. And while the fund had said in its annual report last year that it was planning to boost the proportion of non-public market investments to 50% two years later, that commitment did not appear in its annual report this year. 
 
When asked about whether CIC will still aim to reach the allocation goal, a senior investment executive at CIC told AsianInvestor: "It's difficult to say, it will depend on market opportunities."
 
This goal remains unchanged, but the sovereign wealth fund said achieving this in its original timeline may not be possible, because this will depend on sufficient market opportunities. It has nothing to do with investing less overseas and shifting more capital to the onshore market, the executive said.
 
CIC noted that its allocation to alternatives dropped in 2019 because the prices - and therefore value - of public stocks rose at a faster rate than those of private market assets, causing the latter to drop as a proportion of its portfolio. In addition, CIC did not identify many good investment opportunities in the private markets during the year, he said.
 
The sovereign wealth fund's alternative investments include a wide variety of assets that include hedge funds, risk parity investments, industry-wide direct investments, industry-wide private equity, private credit, resources/commodities, real estate, and infrastructure. 
 
NEW COMMITTEE
 
The fund has also undergone a change to its governance, after establishing a new asset allocation and investment policy committee in February this year.

This committee oversees the allocation of the "entire overseas portfolio, and better ensure that asset allocation objectives are being implemented across our portfolio and driving investments in line with our strategy", CIC said in its annual report.

However, the formation of the team may have led to some internal dissatisfaction, as evidenced by a string of departures from its investment team after the set-up of the team. Between April and June, CIC saw the departures of Wallace Yu, head of multi-asset, Susan Gao who was in charge of global fundamental equities managing more than $10 billion, and Meng Chen, a team leader at CIC direct investment arm.

Peng Chun

The committee is led by CIC chairman Peng Chun and involves all senior staff in the institution. It's repsonsible for making the fund's most important investment decisions, the unnamed executive said. The job duties of the three departed staff are now shared among other members in the relevant team, they added.

Part of this is likely to include the development of more inhouse investment capabilities. CIC has already increased inhouse investments to the point that externally-managed assets in its global investment portfolio fell to 52.2% in 2019, down from 62.6% two years before.

CIC wants to develop these in-house capabilities further, the executive noted, adding that sizeable external mandates command a management fee that is much higher than the cost required to employ internal staff to do the same job.

INVESTMENT CAUTION

CIC was established in 2007 to diversify China’s foreign exchange holdings. Its three subsidiaries are CIC International, CIC Capital and Central Huijin. The former two conduct all overseas investments, including into alternatives, while Central Huijin undertakes equity investments in key domestic state-owned financial institutions.

At the end of 2019 CIC had total assets of $1.045 trillion and net assets of $946.9 billion, of which the aggregate state-owned financial capital managed by Central Huijin Rmb 4.78 trillion ($700.39 billion). This means CIC had $345.31 billion in its global portfolio. 

Facing Covid-19 and ongoing geopolitical tensions, CIC will be more prudent in its investment and employ more hedging tools across assets, particularly in stock markets, the unnamed executive said. The sovereign wealth fund had 55.2% of its public equity in the overseas portfolio invested into the US.

Source:CIC