China’s social security fund NCSSF has reported its lowest annual return since inception (apart from 2008) at just 0.84% for 2011, way below the inflation rate of 5.4%.

The National Council for Social Security Fund’s income for last year plunged 77% to Rmb7.34 billion ($1.15 billion), it revealed in its results report.

Only once has NCSSF reported worse results since it was formed in 2000, and that was in 2008, when it suffered a loss of Rmb39.37 billion and saw a negative return of -6.79%. Its annual return in 2010 stood at 4.23%.

Last year's slowdown in AUM growth can be attributed to a drop in government contributions and a decline in investment returns, says Shanghai-based consultancy Z-Ben Advisors.

“While the annual results aren’t pretty, NCSSF remains the primary lender of last resort for China’s pension system,” notes Z-Ben sales director Francois Guilloux. “In the face of unstable market trends, the social security fund opted for a slow and steady approach, biding its time and making gradual changes to its asset allocation and exposure on high-risk assets.”

On an accumulated basis, NCSSF has recorded total investment income of Rmb284.6 billion since inception, at an average annual return of 8.4%, well above average inflation of 2.43% over the period.

Despite global financial market volatility last year, NCSSF managed to stay in the black thanks to its private equity investments.

Its income statement shows that as at the end of 2011, the fund’s long-term equity investment return increased 29% year-on-year to Rmb5.45 billion; income from private equity investment hit Rmb106.82 million, triple the amount in 2010.

In contrast, the trading value of its financial assets sank by Rmb35.7 billion, more than triple the Rmb10.5 billion decline in fair value from 2010.

Speaking at a public forum last month, NCSSF vice-chairman Wang Zhongmin noted that 70% of the fund’s total returns last year came from investments into unlisted private equity firms. 

As at the end of last year, NCSSF had committed capital of Rmb19.7 billion (Rmb12.5 billion paid) in 13 PE funds managed by Haitong-Fortis PE Fund Management, Bohai Capital, Hony Capital, CDH Investments, Citic Capital, Legend Capital and GP Capital.

Looking ahead, the council aims to increase investment in selected PE funds and intends to acquire strategic stakes in central state-owned-enterprises. Its allocation to domestic private equity funds this year is set at Rmb30 billion, with a target to increase this to Rmb50 billion by 2015.

The annual report reveals that the fund’s total AUM stood at Rmb868.8 billion by the end of last year, of which 50.6% was invested in fixed income assets, 32.3% in equities and 16.3% in real estate.

The council has remained consistent when it comes to awarding mandates. Last year it managed 58% of its assets internally (Rmb504 billion) and the rest via external managers (Rmb364.7 billion). In 2010, 58.1% was managed in-house (Rmb497.7 billion) and 41.9% externally (Rmb358.93 billion).

However, it paid much more to trustees as the compensation for managers on the P&L jumped from Rmb724.2 million in 2010 to Rmb1 billion last year.