A Glimpse Inside the CIC’s Portfolio

Last week, the China Investment Corporation (CIC), China’s sovereign wealth fund, filed what seems to be its first ever 13-F disclosure with the U.S. Securities and Exchange Commission (SEC).  The move is significant both from a financial disclosure perspective, showing as it does the CIC’s continued commitment to disclose information about its portfolio in line with other institutional investors (13-F’s are required of investment managers managing over US$100 million in assets, and report their U.S. long positions, including options and shares), but also because it allows a glimpse into a part of the Chinese government’s foreign asset portfolio. As RGE has noted in the past, how China allocates the approximately US$2.8 trillion in government managed foreign assets, will be important for several asset classes.

The 13-F reports only CIC’s U.S. listed equity holdings, which were worth about US$9.6 billion at the end of 2009, or likely less than 10% of the CIC’s total international portfolio. CIC’s total US holdings are likely somewhat higher than the US$9.6 billion indicated here including real estate holdings, private equity as well as fixed income. The listing does not seem to include CIC’s stake in Blackstone (2007) and initial stake in Morgan Stanley (2008), though it does include the purchase of common stock in the financial institution made in the summer of 2009. This suggests that total U.S. holdings are likely well over US$20 billion.

Moreover, the CIC also has stakes in equity not listed in the U.S. Stakes reported in the press that are listed on other exchanges or are debt securities would add at least another US$5 billion. These include assets in Mongolia, Kazakhstan and Indonesia. The snapshot of the CIC’s portfolio illustrates several broad trends in the sovereign fund’s asset allocation and the broader national asset allocation including exposure to resources and financials. Moreover they illustrate that since the CIC started redeploying capital in earnest in H2 2009, it has sought to build up a diversified portfolio with exposure to a range of different sectors and countries. It has done so quickly by both acquiring very small stakes in a number of companies and by turning to low fee investment funds for broader exposures.

Despite these purchases, at present, domestic financial sector holdings still make up the bulk of CIC’s portfolio, likely accounting for around US$200 billion of the CIC’s reported US$300 billion in assets under management at the end of 2008 as reported in their first annual report. This split could change if Z-Ben is right and the CIC receives a new capital transfer in the near future. (Ashby Monk highlighted this point last week) Whether or not the CIC gets this new capital in the time frame discussed, Chinese government investors are likely to continue their moderate diversification approach. The RMB’s dollar peg will be a constraint, but the CIC and other government investors are clearly looking for deals.

Some interesting trends emerge from the data.

1) Aside from a few large equity stakes most of the CIC’s U.S. listed equity exposure consist either of very small stakes or stakes in broad sectoral or regional funds. A significant share of its investment is thus passive.  The CIC seems to have found Exchange Traded Funds (ETFs) and similar instruments to be good ways to quickly gain access to a range of sectors. Exposure through such funds accounts for about ¼ of the total U.S. equity exposure as reported in this filing.

Beyond, three large stakes in Teck Resources (US$3.4 billion at the end of 2009), Morgan Stanley (US$1.7 billion) and Blackrock (US$0.7 billion), the exposures to individual stocks are relatively small. The use of index funds and exchange traded products is consistent with the CIC’s desire to minimize fees particularly on passive investments, while still maintaining a diversified portfolio. Other SWFs like the Abu Dhabi Investment Authority’s have found indexed products attractive.



Source: SEC, RGE


2) Rather than just diversifying from U.S. assets, the CIC is diversifying within U.S. dollar denominated assets. A year ago, the CIC had much of its international portfolio in cash-link instruments including money markets.  Now much of it has been deployed in equities and entrusted to alternative asset managers.

Most of these assets reported here are listed in the United States. There are some notable exceptions, mostly in the resource sector and also Canada’s Research in Motion. The portfolio included ETFs to gain exposure to China, Japan, emerging markets and the U.S. as well as the Global EAFE fund.

In addition to these holdings, CIC has reported stakes exceeding US$6 billion in several Hong Kong and London-listed equities as well as convertible debt of Malaysian and Indonesian coal companies. The CIC’s stake in American Electric Power’s wind energy arm, is not on this disclosure, perhaps as regulatory approval is pending. Adding these holdings would take the CIC’s visible holdings to well over US$16 billion.

The CIC likely has similar exposure to a cross-section of European equities, and further equity holdings in Asia. It has probably increased exposure to Latin America directly, as well as purchasing stakes in Vale traded in the U.S. This might bring CIC’s equity allocation to about US$25-30 billion or about 30% of the international portfolio.  This allocation is consistent with the original asset allocation plans touted in 2008 as well as roughly similar to that of other sovereign wealth funds. Given CIC’s desire to make high returns to offset the costs its parent incurred in its recapitalization process, an equity and alternatives heavy portfolio is to be expected.

3) The CIC is heavily exposed to resources, especially metals and mining, consistent with the sector’s weight within China’s foreign assets. The share of gold alone is particularly noticeable. The CIC not only has stakes in gold producers like Anglogold Ashanti but also in the SPDR gold fund.  The exposure U.S. traded energy equities is somewhat smaller. The CIC does of course have stakes in some foreign energy companies, but the bulk of China’s 2010 energy purchases were made by the China Development Bank which extended loans to several cash-strapped energy companies and countries.

Within energy, clean tech is a focus. Chinese investment in the sector domestically and internationally is on the rise, befitting a country that has become a major assembler of clean tech components. More investment and some partnerships (for example with HK based Poly energy) suggest the CIC is providing R&D capital for these key sectors.  Such partnerships seem reminiscent of some of Mubadala’s deals.

4) The CIC is still very exposed to U.S. financials. Large stakes in Morgan Stanley and Blackrock account for over US$2 billion combined (end 2009 valuations), but the CIC also has stakes in several large U.S. institutions (Bank of America, Wells Fargo), U.S. community banks and insurance companies.

Other sectors of interest include health (both pharmaceutical companies and insurance) and other industrial holdings. Despite stakes in some U.S. railroads, interest in transportation related companies and media, telecom and technology is more muted.





Source: SEC, RGE


5) Given this asset allocation, the CIC