* CIC posts first net profit drop since 2008
* Says choppy markets hurt stock investments, sees more
* Doubled private equity, alternative investments in 2011
* Sharply increased investment in govt, govt agency bonds
By Koh Gui Qing and Langi Chiang
BEIJING, July 25 China's sovereign wealth fund
China Investment Corp. suffered its first-ever drop in net
profit in 2011 and predicted tough trading conditions may
persist as volatile financial markets dent stock investments.
But in a sign the $482-billion fund is sticking to plans to
become a more aggressive investor, CIC doubled its investment in
private equity, direct investments and hedge funds in 2011 to 43
percent of its portfolio, compared with 2010.
It said its private equity and direct investments were
focused on sectors such as energy, resources, real estate and
"Looking ahead, the global economy will continue to recover
but the process will be fragile," CIC Chairman and Chief
Executive Lou Jiwei said in the fund's 2011 annual report
released on Wednesday.
"With fresh volatility in the financial markets still posing
serious risks, CIC will adhere to prudent investment
CIC said it earned a net profit of $48.4 billion in
2011, down 6.1 percent from a year ago. The drop in earnings was
matched by its worse-ever return on overseas investment since it
started publishing annual reports in 2008, at minus 4.3 percent.
Private equity and direct investments accounted for 31
percent of total investments last year, CIC said, while hedge
funds accounted for 12 percent.
That is a marked rise from 2010 when CIC invested only 21
percent of its portfolio in private equity and hedge funds, and
just 6 percent in 2009.
"The key point is that CIC is divesting into private equity,
so more volatility is to be expected," said Michael McCormack,
an executive director at Z-Ben Advisors in London.
He said despite the drop in net profits, CIC still
outperformed the MSCI world equity index, which
he believes is the best proxy for the fund's overseas
investments. The index shed 9.4 percent last year.
"So even with all the new private equity investments, we're
seeing CIC outperform the wider market," he said.
MORE GOVT BONDS, FEWER STOCKS
CIC's growing interest in private equity is in line with its
strategy to transform from a slow-paced, low-return sovereign
investor into an institution that chases higher returns and
plays a bigger role in dealmaking.
To accommodate its focus on private equity, CIC said it has
extended its investment horizon to 10 years, and would use a
rolling 10-year annualised return as its main performance
measure. It said it had invested all its capital in 2011.
A breakdown of its fund distribution showed it pared its
stock holdings to make room for other assets. Stocks took up 25
percent of CIC's portfolio in 2011, down from 48 percent for
equities in 2010.
CIC said it suffered losses in its stock holdings last year
as rising oil prices, Japan's tsunami disaster, policy
tightening in emerging markets, Europe's debt crisis, and the
U.S. credit rating downgrade roiled markets.
It highlighted energy and resource stocks as being badly
hit. Recent private equity investments that have yet to earn
returns also dragged on overall performance, the fund said.
But CIC said turbulent markets benefited its bond and credit
investments, which outperformed stocks.
Its holdings of government and government agency bonds
ballooned to 69 percent of its total fixed income portfolio, up
sharply from 47 percent in 2010. Its total fixed income holdings
rose around 11 percent to $39 billion in 2011.
The annual report did not give a breakdown of how CIC is
invested across regions, though it did show the fund is most
invested in North American equities, at nearly 44 percent. Asia
Pacific equities was at a distant second at 30 percent.
CIC was reported in June to have cut its stock and bond
investments in crisis-stricken Europe, but it
made no mention of pulling funds out of the region in its annual
Created in 2007, CIC was tasked to earn higher returns from
riskier investments using part of China's foreign exchange
reserves, which at over $3 trillion are the world's largest.
On a cumulative annualised basis since CIC's founding in
September 2007, the fund's 2011 return was 3.8 percent, down
from 6.4 percent in 2010.