UPDATE 1-China sovereign fund sees tough 2010 after good 2009

* CIC faces challenging 2010, but positive long-term

* Overseas portfolio returns 11.7 pct after 2.1 pct '08 loss

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BEIJING, July 29 (Reuters) - China Investment Corp (CIC) faces a challenging environment in 2010 but its long-term prospects remain rosy, the $300 billion sovereign wealth fund said in its annual report published on Thursday.

After global markets rebounded in 2009, sovereign wealth funds, which manage an estimated $3 trillion in total, are slowly emerging from the credit crisis. For more on sovereign wealth funds around the world, click on [ID:nL236030]

CIC made a net profit last year of $41.66 billion, up from $23.1 billion in 2008, according to the report, which was published in Chinese and English on its website, www.china-inv.cn.

The fund was set up in 2007 with a mandate to earn a higher return, as a reward for taking higher risks, on a sliver of China's international reserves, which now total $2.45 trillion, the largest in the world.

CIC made a positive return on its overseas investments last year of 11.7 percent, after a loss of 2.7 percent in 2008. Return on equity jumped to 12.9 percent from 6.8 percent.

The fund, which also holds big stakes in China's major state-controlled banks, added $58 billion to its overseas holdings last year, mainly in publicly traded bonds and stocks.

From September 2007 until the end of 2008, a year when global markets were depressed, it had invested only $21 billion abroad, keeping most of its money in cash.

"The condition of the global economy is by no means certain and the markets remain volatile. However, we are a long-term investor with a positive long-term view," CIC Chairman Lou Jiwei wrote in the report.

At the end of 2009, CIC's global investment portfolio was valued at $81.1 billion, with 36 percent in equities, 32 percent in cash and cash equivalents, 26 percent in fixed-income products and 6 percent in alternative investments.

Excluding cash, CIC breaks down its portfolio into "diversified" investments, accounting for 77 percent of the total, and "direct concentrated holdings", which make up 23 percent.

It said 59 percent of its diversified portfolio was managed externally and 41 percent in-house.

Direct concentrated holdings, or large-scale investments held for the longer term, make up the largest individual chunks of CIC's global portfolio. In 2009 they were mainly in the natural resources, green fuels, infrastructure and financial services sectors.

Of its diversified equity portfolio, 43.9 percent was in North America, 28.4 percent in Asia Pacific, 20.5 percent in Europe, 6.3 percent in Latin America and 0.9 percent in Africa.

Of its diversified fixed-income portfolio, 44 percent was in government bonds, 27 percent in agency issues, 13 percent in corporate debt, 8 percent in asset-backed securities and 9 percent in other structured debt products.

The fund had 246 employees at the end of 2009, including 83 in investment management, the annual reported said. CIC advertised 64 new positions this week.

CIC reiterated that its investments are made on commercial grounds and that it does not seek management control when it buys into a company. (Reporting by Zhou Xin, Sally Huang and Alan Wheatley; Editing by Hugh Lawson)