Increased diversification and insourcing of talent failed to pay off for Chinese sovereign fund CIC last year after it recorded its worst annual performance since inception in 2007.
China Investment Corporation saw a loss of -4.3% in 2011, in contrast to a gain of 11.7% in 2010, according to its annual report released earlier this week.
It finished the year with $482 billion in AUM, up 17.8% from $409 billion in 2010. Of the latest figure, 57% was managed externally – a reduction from 59% at the end of 2010. It managed 43% of assets internally by the year’s close, from 41% in 2010.
It had 80% of assets in diversified holdings by the end of last year, up from 76% in 2010, with a reduced 20% in concentrated holdings (24% in 2010).
It’s worth noting that 2011 was the first time CIC has fully deployed its investible capital. It also received a $30 billion injection from the central government.
Yet it struggled, with its loss in 2011 heavier than the -2.1% negative return it suffered in 2008. Last year saw CIC’s net income shrink 7.7% to $48 billion, from $52 billion in 2010.
Overall CIC slashed its public equity exposure to 25% last year, from 48% in 2010; it cut fixed income to 21%, from 27%; increased its cash position to 11%, from 4%; and added absolute return investment of 12% (new category).
Importantly, CIC also moved to increase its exposure to alternative assets to 31%, from 21% in 2010, in particular into long-term private equity. Alternatives now account for $41 billion on its balance sheet, up 38% from $29 billion in 2010.
Aside from financial market volatility, CIC attributed its poor performance last year to the fact that its private equity forays are still at an early investment stage.
It also pointed to the shrinking market values of its portfolio companies in energy and resources. Its unrealised losses from changes in the fair value of its investments stood at $11 billion last year, in contrast to gains of $10 billion the year before.
“We calibrated our asset allocation to better reflect the longer investment horizon [10 years, from five years previously] and to enhance the flexibility of our investment portfolios,” notes CIC chairman Lou Jiwei.
“We have gradually built up positions in non-public market assets, particularly direct investments and private equity in such industries as energy, resources, real estate and infrastructure.”
Direct investments by CIC include Sunshine Oilsands (C$150 million), Thames Water Utilities (£276 million), GDF Suez EPI SA ($3.15 billion), Polyus Gold ($425.5 million), Atlantic LNG Company ($850 million), Shanduka Group (South Africa, R2 billion), and Horizon Roads (A$300 million).
In its public market positions, CIC is overweight index and index-enhanced funds. It bolstered its stake in government bonds to 62% of its fixed income portfolio, from 38% in 2010, and cut corporate debt exposure to 21%, from 32%. Government agency bonds, asset-backed securities and other structured products made up the rest.
Overall the regional distribution of CIC’s equities portfolio has remained largely unchanged from 2010, with North America counting for nearly 44%, Asia Pacific 30% and Europe 20.6%. The remainder goes to Latin America and Africa.