Spreading wealth

China's sovereign wealth fund banks on diversifying investmeng, with new focus on Africa

The nondescript building in downtown Beijing does not merit a second look, but behind the glass facade is the office of China Investment Corporation, the nation's $575 billion sovereign wealth fund that predominantly invests in overseas markets. There is no sign of wealth among its sparsely furnished offices, including the chairman's. It looks and feels like any government office in China.

On any given day, it is not uncommon to see groups of people huddled over balance sheets and maps of Europe and Africa holding forth on the state of economies, investment options and pricing strategies. They represent the real wealth of the CIC, helping it achieve stable, assured returns for investors.

According to its latest annual report, CIC posted a 10.6 percent gain on its global investments in 2012, compared with a 4.3 percent loss in 2011.

But Ding Xuedong, the new chairman of the sovereign wealth fund, recently remarked that these are still tumultuous, uncertain times for the global financial community.

While most sovereign wealth funds, such as Temasek of Singapore and the Norway Government Pension Fund, still prefer asset-backed investments, CIC has gone for a more pragmatic approach and diverse investment portfolio.

For this reason, the fund is looking more to Africa nations for investment opportunities.

Fund officials say CIC's main objective is to make more money from its overseas investments and generate additional capital for investment.

Such adjustment of the investment portfolio and the higher equity prices saw the fund post robust returns last year, especially from the long-term assets in global markets. The cumulative annual return of CIC's overseas investments rose to 5.02 percent by the end of last year, from 3.8 percent in 2011. Net income rose to $77.4 billion, up from $48.4 billion in 2011, the annual report says.

Fund officials maintain that such a good performance has been possible due to the fund's diverse approach.

"It enabled us to adjust our investment portfolios in line with the higher equity prices in global markets last year," a CIC official says.

During the same period Temasek of Singapore achieved returns of 1.5 percent, while the fund from Norway came in with 13.4 percent. Other wealth funds such as Singapore's GIC and the Abu Dhabi Investment Authority have yet to publish their earnings.

"When you look at these numbers, you can see that (CIC's) 10.6 percent is a good return on investment for a sovereign wealth fund," says Victoria Barbary, director of Sovereign Wealth Center, a London-based market intelligence firm.

But those human talent assets at the fund offices in Beijing know CIC cannot afford to rest on its laurels.

"The fixed-asset strategy boomeranged in 2010 after our Morgan Stanley equity investments saw a steep erosion in value," the CIC source says. "Our losses were in the region of $115 million. We also faced a lot of flak for staying invested in overweight US Treasury bonds.

"It was then that the fund decided to broaden its investment portfolio from financial products to infrastructure and industrial projects, and also geographically from North America to Europe and other emerging markets in Asia and Africa."

According to Barbary, CIC's shift toward an endowment model is also an indication that the fund is not confident of receiving future funding from the People's Bank of China, the central bank.

Since the fund's launch six years ago, the State Administration of Foreign Exchange, which manages the country's $3.5 trillion foreign exchange reserves, has only given it an additional $49 billion to invest abroad ($30 billion in 2011 and $19 billion last year).

With further capital injections uncertain, CIC is increasing its exposure to assets that yield fairly predictable short and long-term cash flow for reinvestment, she says.