The accidental hero of China Investment Corp: Wei Gu

-- Wei Gu is a Reuters columnist. The opinions expressed are her own --

By Wei Gu

HONG KONG (Reuters) - China Investment Corp's figures show it to be probably the best performing sovereign fund globally last year -- if only by default.

CIC delivered an impressive 6.8 percent return on registered capital of $200 billion in 2008, mainly due to the performance of its domestic investments, which account for about half the portfolio. In particular, it benefited from strong returns from Huijin, a company controlled by CIC, which holds the state's shares in big commercial banks such as Bank of China (3988.HK) (601988.SS), the Industrial and Commercial Bank of China (1398.HK) (601398.SS), and China Construction Bank (0939.HK).

Typical equity portfolios held by existing sovereign funds lost an estimated 45 percent between end-2007 and early 2009.

True, CIC didn't do very well with its overseas investments. It attracted attention for piling into two big situations -- making investments in the U.S. private equity firm Blackstone (BX.N) and Morgan Stanley (MS.N) relatively early in the financial meltdown and taking heavy losses. These attracted particular ire in China, which seems to have encouraged CIC to draw in its horns. It kept almost 90 percent of its global portfolio in cash. This actually protected it from underperformance and the half of its funds invested globally delivered a negative return of just 2.1 percent.

CIC's ultra-conservative strategy meant that it missed lost some good investment opportunities. For example, it passed a chance last autumn to become Morgan Stanley's largest shareholder at rock bottom prices. Indeed, it had to buy back in -- stumping up $1.2 billion earlier this year to prevent its stake from being diluted by Japan's Mitsubishi UFJ (8306.T).

But if sitting on your hands was a smart investment strategy in 2008, it is less likely to pay off this year. True, CIC can continue to count on its domestic portfolio to give it another boost, after the Chinese stock market rose about 80 percent with financials leading the pack.

But CIC will be at a disadvantage to those funds that are already invested in the market. It doesn't want to be caught out by investing too rapidly just in order to put money to work. CIC has made some sound investments, for example Canadian's Teck Resources (TCKb.TO) has risen as much as 70 percent since CIC's investment. Huijin's purchase of Chinese banks shares during the market downturn also looks sensible now.

Its Chairman Lou Jiwei said last year in Washington that "if there is a big fat rabbit, we will shoot it." He was referring to purchasing large strategic stakes at advantageous prices. There are still plenty of overstretched financial and industrial companies out there that might welcome a strategic shareholder. Lou Jiwei must be hoping that he can bag a few.

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(Editing by David Evans)