Oxford SWF Project

Ashby Monk

In January 2011, Gao Xiqing, President of the $410 billion China Investment Corporation, was quoted as saying:

“Theoretically, we are a long-term investor…but you can’t really function on a ten-year horizon.”

At the time, I thought that was an unfortunate position (if understandable given the constraints on any investor). I thought the CIC, like many other SWFs, was in a unique position in that it had the ability to take intergenerational bets and incorporate long-term risks into investment decision-making. It was (and is) my view that there’s big upside for investors that can patiently invest in risky, illiquid assets and be able to ride out down years with appropriate rebalancing strategies in the troughs. In fact, I was so passionate about this point that, after Gao Xiqing’s comments, I said (quite publicly),

“…why not, Mr. Gao? If SWFs really do have infinite time horizons, shouldn’t a ten-year time frame be easy? And more to the point, why would sovereign funds give up the risk premiums that can be reaped from long-term illiquidity?”

Well, readers, I’ve got news. Since January, the CIC leadership has had a change of tune, and the fund’s latest Annual Report has some interesting new thoughts about the CIC’s time horizon. (By the way, once again the CIC annual report is a remarkable piece of work; it ticks all the boxes of what an annual report should do. I want to acknowledge that fact.) Anyway, here’s the CIC’s new view on investment time horizon:

“In January 2011, the Board of Directors decided that the investment horizon of CIC should be extended to 10 years to keep with its long term mandate and that a rolling 10-year annualized return would, over time, also become an important measure of investment performance, while continuing to measure and monitor annual portfolio return. This change allows CIC to think longer-term, invest over longer horizons and accept a higher risk return profile in its investment portfolio in order to better balance short-term pressure and long-term interests.”

Dare I even ask? Is it possible Mr. Gao was actually listening to what I had to say? Cue bucket of icy water: almost certainly not. Notwithstanding, I do genuinely think this is a great policy. And, given that people manage to measurements, I’d expect real change (so long as the fund has incentive compensation smoothed appropriately).

And, you might ask, what does all of this mean in terms of practical investment strategy? Here’s Lou Jiwei with an explanation:

“We reduced our cash holdings and increased our investments in alternative assets with a view to further diversifying our portfolio. We entered the year with 32% of our global assets in cash and ended the year with cash accounting for only 4% and USD 35.7 billion worth of newly deployed investment. As a long-term investor, deployment of our capital in 2010 was weighted towards private equity, infrastructure and other direct investments, guided by our strategic asset allocation plan.”

It sounds as if the CIC is going long to me!