GIC! CIC! SWF Reports Oh My!
It’s a big day for SWF watchers. Not only one but two of Asia’s largest SWFs released annual reports today –Singapore’s GIC and the Chinese Investment Corporation (CIC). Both reports give some detailed info on the asset allocation (currency and asset class) and returns (though GIC reports returns only on a 5 and 10 year horizon). More interestingly they also give a good view into some of the ways in which long-term sovereign investors are looking at risk and thus how they might think about hedging these risks in an uncertain global growth and investment environment.
The release may well be coordinated, as both are key members of the International Forum of Sovereign Wealth funds, and see reporting as a key part of fulfilling the Santiago principles, as well as trying to reduce misinformation out on sovereign funds. One could only hope that ADIA might decide to create a trifecta, releasing an annual report shortly to follow up on its maiden offering last year. Here’s hoping.
In aggregate, these reports support the broad story that global sovereign wealth is nearing new highs, as countries seek higher returns on their excess reserves, and oil exporters benefit from higher oil prices (as a side note, data from the Saudi monetary Agency confirms that its foreign assets reached a new peak in June at US$450 billion). The largest growth in sovereign assets under management seems set to be in non-oil exporting EM, particularly in Asia, given that oil exporters are doing a good job absorbing the revenues (but more on that in a coming note).
I’ll need to take some time to actually read the reports, but for today, a couple quick thoughts on the CIC report. The second annual report, showed another year of 11.7% returns, highlighting that it is fully invested and presumably ready for more capital. The CIC has been seeking new capital for most of its existence, and now with only 4% left in cash, and China’s reserve pile growing, the requests are reportedly getting more insistent.
Although CIC reports a portfolio size of US$410 billion, it’s worth remembering that about half of this is the valued stakes in Chinese financial institutions. CIC’s international portfolio has experienced a sizeable increase reaching US$135 billion at the end of last year, from an estimated US$70-80 billion in 2008. Size-wise, the international portfolio is similar to China’s Q2 reserve accumulation (adjusted for valuation) and is by our count the world’s 5th largest SWF, after Norway, Abu Dhabi, Kuwait, Singapore’s GIC and putting it in line with Singapore’s Temasek’s foreign portfolio, and likely that of the Qatar Investment Authority.
Still, CIC’s foreign assets are still a drop in the bucket of China’s US$3.5-6 trillion in foreign assets. The report depicts an organization looking for growth and the report seems to be ammunition in the CIC’s long-standing quest to manage more of China’s sovereign wealth. So far this year, it has established several new offices, including in emerging markets (as well in Toronto where many resource-focused equities list). Moreover, in pointing to 11.7% returns for two consecutive years, one imagines that the CIC may be sending a message that it can manage China’s money well, and implicitly better than SAFE. We would not be surprised to see CIC receive more capital, but other interests may seek to capture more of the incremental asset growth (including some of the policy banks) and receiving more new capital would necessitate a clearer pattern for transferring the capital and perhaps eventually spinning off Central Huijin (manager of the bank stakes). No doubt, the tug of war over China’s foreign asset management between ministry of finance (CIC’s parent, though it reports right to State Council) and the central bank will continue.
A few investment considerations
- Although it doesn’t have an aggregate currency/region composition, the CIC’s portfolio is much less dollar heavy than China’s overall portfolio. U.S. equities make up just over 40% of the overall equity portfolio, above all regions bar emerging Asia. Our broader estimates suggest that China’s overall portfolio is closer to 60-65% USD, as the largest part of the portfolio, China’s US$3.2 trillion in FX reserves remains overweight in USD assets. Similarly, GIC’s asset allocation shows a consistent diversification away from the US/EU assets and towards EM, including new regions such as Latam, a move that CIC has also made.
- The CIC has confirmed its definition of long-term investment as a 10 year horizon, presumably somewhat longer than its previous benchmark. This has a few implications, particularly in the area of risk management, but presumably also may be part of preparing internal and external audiences for lower and potentially more returns.
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