Is China's CIC Going To Mirror Yale Endowment? New Management May Be The Key

Jan 22 2014, 9:17am CST | by

A changing of the guard at the top of the China Investment Corporation, the $575 billion Chinese sovereign wealth fund, may take it closer to resembling its newfound role model: Yale Endowment.

Today, word reached the Chinese press that Gao Xiqing, the president of CIC and also one of its founders, is to step down into retirement, to be replaced by the chief investment officer he recruited in 2011, Li Keping. This is the second major change at the top of CIC in less than a year, after Ding Xuedong became chairman in July.

At first glance, this might not suggest any major change of direction at CIC. Gao and Li and thought to see investment strategy very similarly. Well before they worked together at CIC, the two were colleagues at the National Council for Social Security Fund (NCSSF), China’s biggest state pension; the Chinese funds management specialist Z-Ben says that while there, the two worked together to improve the fund’s investment returns and expand its overseas allocation.

However, it is notable that a considerable change in CIC’s investment strategy took place not long after Li became CIO.

In its early days, CIC was characterised by some ill-advised investments in western institutions, notably Morgan Stanley, in an attempt to find bargains in the global financial crisis. While CIC did eventually make money on its Morgan Stanley investment, it got considerably worse before it got better, and CIC  - which logged a 2.15% loss in 2008, its first reported year of returns – was burned by the experience. In the following years it showed more of a focus on frontier commodity assets, such as miners in Mongolia, before evolving into a more sophisticated and balanced allocation of assets. In 2011, 25% of its assets were in diversified public equities, 21% fixed income securities, 11% cash, 12% alternative assets (which at CIC mainly means hedge funds), and 31% long-term investments, which includes private equity, energy, mining, real estate and infrastructure. But the fund once again made a loss in 2011, after positive returns in 2009-10.

CIC’s 2012 annual report reveals that the fund reviewed the experience of other institutional investors in the previous five years, and decided that year to move to a new allocation model again, this time based upon what it calls the “endowment model”. This is an inexact term, but typically refers to the approach characterised by endowment funds such as Yale and Harvard, which involves heavy use of alternative assets, and in particular private equity. (I took a closer look at the Yale and Harvard models in this article.) With Li having joined the team in 2011, he appears to have been instrumental in the decision, and should be expected to continue to push it through now he is in charge.

There is already evidence of this. In 2012 CIC increased its focus on infrastructure, agriculture, and other assets that generate steady returns, and it says it developed a new model for investment in private equity. Examples of direct investments in 2012 included Thames Water and Heathrow Airport Holdings in the UK: proven, generating steady returns, developed-world infrastructure. By the end of 2012, the ‘long-term investments’ category was up to 32.4%, and 12.7% in alternatives; over 40% of the funds in non-traditional assets.

In that respect, it already looks a lot like Yale, which had as much as 35.3% in its target allocation to private equity in 2012, before dropping back to a 31% target for fiscal 2014. Li at the helm suggests this will be the pattern for the future. The next question: will it work? And the one thing that’s for sure about private equity investments is it takes a long time to be sure if they’re the right ones.

Source: Forbes Business

 
 

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