China’s $1 Trillion Sovereign Fund Posts 17% Gain on 2019 Stock Rally

(Bloomberg) -- China’s $1 trillion sovereign wealth fund posted a 17.4% return on overseas investments last year as global stocks rallied, boosting its finances as it combats volatile markets amid the pandemic.

Net income, which also includes profits from holdings in the nation’s state banks, jumped 70% to $110.3 billion, according to China Investment Corp.’s 2019 annual report, posted on its website on Friday. The overseas return, reversing a loss in the previous year, was in line with an unaudited result of about 17% disclosed by Executive Vice President Zhao Haiying in an interview in May.

The solid 2019 returns would lift CIC’s 10-year performance metrics and ease pressure on Chairman Peng Chun as the company adjusts investment strategies amid short-term volatility and loss of talent. The company is looking for more resilient assets this year while pressing ahead with a shift toward alternative and direct investments for more stable returns, according to Zhao.

“2020 is also the most testing year for CIC since its establishment” in 2007, the company said, citing the pandemic, fluctuations in global financial markets, tightening overseas regulations and deteriorating global trade and investment environments. “Outbound investment risks have increased notably.”

With Covid-19, this year is set to be more challenging for sovereign wealth funds. Temasek Holdings Pte, the Singapore investor, reported its worst annual performance since 2016 for the year through March 31. The world’s largest wealth fund in Norway has embarked on an historic asset sale to generate cash, while Panama’s savings fund in July had to make its first cash withdrawal to fight the virus.

CIC shifted to “emergency management mode” for overseas investments this year, cutting its portfolio risk guidance in a “timely fashion,” the company said. The fund captured some opportunities from “market misalignments” and increased exposure to the digital-economy and credit assets. That enabled its returns to beat benchmarks in the first half, it said without providing details.

Alternative assets, the biggest category including hedge funds and direct investments, fell by almost 2 percentage points last year to 42.2% as of Dec. 31, reversing an increase in 2018. Fixed-income assets expanded by 2.5 percentage points to 17.7%, according to the annual report.

The fund’s asset allocation strategies had been kept largely stable this year but the company did “tilt a little bit” to avoid excessive short-term volatility and “permanent losses,” Zhao said in May. Its private portfolio, including real estate and private equity, avoided “serious damage” even as cash flows slowed, she said.

CIC has lost some of its most experienced investment professionals over the past few months as a string of senior departures from a few years ago extended, eroding its ability to bolster performance amid tumult. Among others, Susan Gao, who resigned in April, had consistently beaten the MSCI All-Country World Index with her Global Large Cap Value Equity Portfolio over the past 10 years, Bloomberg reported earlier.

Last year’s results raised CIC’s 10-year annualized net return to 6.6%, 92 basis points above its target, according to the report.

Besides making overseas investments to boost returns on China’s foreign reserves, CIC also holds major stakes in 18 Chinese financial institutions including banks and securities firms through unit Central Huijin Investment Ltd.

©2020 Bloomberg L.P.

With assistance from Bloomberg