I’ve just read the CIC’s 2009 Annual Report from cover to cover (so you don’t have to). And, I have to say, the professionalism and polish exhibited by this young SWF is remarkable. Page after page, the report ticks all the boxes necessary to alleviate both domestic and international concerns about its operations and objectives.
For example, there’s the fund’s new benchmark portfolio; the “four basic principles” underpinning its investment approach and strategy; the new “Core Values” driving the corporate culture; the new focus on improving governance and design; the adherence to the spirit of the Santiago Principles; the pervasive theme of professionalism and commercially oriented investing throughout; and even the photos – which seem to have a clean energy theme – paint a picture of a responsible and trustworthy organization.
Now, this may sound a bit cynical, but this report reads like the CIC paid some management consultant to write up a generic annual report of what an ideal SWF would look like. Then, the CIC took that ‘idealized annual report’ and just doctored it up a bit to match their own unique situation. I say that because it’s that good (albeit short on some of the details we’d like to see in any annual report). In a backhanded kind of way, then, that’s actually a pretty strong compliment. But (!) the question is whether this an accurate reflection of the CIC.
It’s hard to know. I suspect that the CIC has made great strides over the past few years in terms of governance and management. But, as with all annual reports, there is invariably spin and gloss. After all, this is the opportunity for the CIC to give their side of the story. But for those with detailed knowledge of this organization, some of the statements in this report may seem slightly detached from reality. For example, Lou Jiwei notes in his introduction that:
“…we are a long-term investor with a positive long-term view. While CIC, like all investors, measures and reviews its annual results, they are milestones on a longer journey.”
In theory, that should be true for the CIC as for all SWFs. However, we learned recently that Beijing has actually been quite impatient with the CIC and has pushed it into a short-term mindset. Obviously, this doesn’t come up in Jiwei’s comments.
Also, the report dedicates two pages to a case study of the CIC’s investment in the American AES Corporation. There’s one problem: the CIC announced a few weeks ago that it has put the brakes on its AES investment and will not participate in a follow-on equity investment, allowing a letter of intent to expire (though the CIC does remain a big shareholder). Again, this isn’t mentioned in the report either.
Finally, Jiwei notes in his introduction that the CIC has made a “series of direct investments in high quality companies, including investments in the infrastructure and clean and renewable energy sectors.” True. But almost nothing is said about the CIC’s commodity spending spree in 2009, which far outweighed infrastructure and clean energy investing.
Why? Because it would raise some additional protectionist fears. And, if we’re honest, this report is just an exercise in avoiding protectionism. And why would we expect anything else? The impetus behind this annual report (and those of other SWFs such as ADIA and the GIC) was the Santiago Principles, which itself was an exercise to stem protectionism and ensure free markets. In a way, then, the intended audience for this report is the policymakers who hold the keys to Western markets. As the report itself highlights, the EU and North American markets make up 65% of the SWF’s equity portfolio. So, Western protectionism is something that has to be avoided.
In any case, the annual report did have some interesting nuggets of information worth reporting:
- The fund invested roughly $58 billion globally in 2009.
- Return on the global investment portfolio was 11.7%.
- Combined with Central Huijin, the SWF’s return was 12.9%.”
- The CIC grew to nearly 250 team members by the end of 2009 (which means this latest hiring spree will take the SWF well over 300).
- 23% of the fund’s investments are ‘strategic’ in nature; the CIC calls these investments “Direct Concentrated Holdings.”
- 41% of the assets are internally managed, which seems like a lot.
Anyway, there you have it. If you want more, get the annual report here.