CIC combats market volatility with alternatives expansion

China Investment Corporation saw its total assets grow to $482bn in 2011 but registered a loss of -4.3 percent for the year. To mitigate current volatile market conditions, the state fund has continued to increase its exposure to alternative assets.

China’s preeminent sovereign wealth fund, China Investment Corporation (CIC), increased its exposure to alternative assets by $11 billion last year as it shied away from public market assets.

The figure is revealed in CIC’s 2011 annual report, published this week, in which the fund said its alternative investments – which include real estate, private equity and infrastructure – had grown in value to $40.4 billion in 2011 from $29.3 billion in 2010.

While alternative investments increased, the value of CIC’s equities dropped to $59.7 billion in 2011 from $65.6 billion in 2010.

CIC’s total assets under management grew to $482.2 billion in 2011 from $409.6 billion in 2010.

In the report, chairman and chief executive officer Lou Jiwei said: “In 2011, we calibrated our asset allocation to better reflect the longer-term investment horizon and to enhance the flexibility of our investment portfolios.”

“We gradually built up positions in non-public market assets, particularly in direct investments and private equity investments in such industries as energy, resources, real estate and infrastructure.”

He described how the global economic landscape had become subdued after a catalogue of negative events including the Japanese Tsunami, inflation-induced policy tightening in emerging countries, downgrading of US sovereign bonds and the European debt crisis hit investments.

“In the wake of these events, risky assets trended downward primarily with the plunging value of global stock markets, especially in emerging markets,” he explained, while emphasizing how CIC had switched focus to long-term returns. Specifically, he said CIC had decided to extend its investment horizon to 10 years to reflect what he described as a more appropriate approach.

“We bolstered our portfolios against market shocks, refined our risk management system and enhanced our overall risk management capacity.”

Nevertheless, CIC’s efforts to rebalance its asset allocation were not sufficient to stem a loss of -4.3 percent for the year versus gains of 11.7 percent in both 2010 and 2009.

The state fund blamed the negative performance on the nascent stage of its private equity investments in funds and projects offering limited earning potential. Also to blame was shrinking market values in its portfolio of energy and resources companies.

In another key takeaway from the report, CIC said it had received $30 billion in December from the Chinese government for a newly-created international investment unit called China Investment Corporation International. CIC International has been mandated to further diversify the sovereign wealth fund’s holdings, CIC said. As with central organisation, CIC International is expected to invest a portion of China’s foreign reserves.

CIC also said it had grown its number of investment professionals in 2011 by 80 to 405 employees.