Aug 11, 2014 03:26 PM

Closer Look: With Sovereign Wealth Fund, It's Necessary to Take Long View

(Beijing) – China Investment Corp. (CIC), the country's sovereign wealth fund, reported a 9.33 percent return on its overseas investments in 2013. The figure, reported on August 8, is slightly lower than the previous year's 10.6 percent.

The cumulative annualized rate of return for the overseas portfolio since it was established in 2007 is 5.7 percent, compared with 5.02 percent in 2012.

Ding Xuedong, CIC's chairman and CEO, said the figure would be higher than 6 percent if investments in the first half of this year were counted.

Temasek Holdings, Singapore's sovereign wealth fund, said its rate of return on equity in 2013 was only 1.5 percent. Its counterpart in the United Arab Emirates, Abu Dhabi Investment Authority, reported a yield of 7.2 percent every year for the two decades ending in 2013.

Norges Bank Investment Management (NBIM), the body that manages Norway's sovereign wealth fund, gained 15.9 percent on its investment last year, the highest among all sovereign wealth investors that have published their data.

It is hard to compare the performance of sovereign wealth fund because they are different in the amount of assets, portfolios, investment methods and the way returns are reported.

That said, CIC spokesman Liu Fangyu said it would rank in the world's top 25 percent.

In general, small and medium-sized funds are more flexible and more likely to report higher yields because they have a smaller base. Some funds invest heavily in bonds and other low-risk securities, while some others favor high-risk equity investments.

Judging by investment methods, some funds play the role of financial investors, and some are more involved in the invested companies' daily management. As for yields, most funds report only their gross rate of return, but others report their net rate of return.

These differences mean that the performance of sovereign wealth fund cannot be simply measured by their yields.

Also, sovereign wealth funds must be evaluated over a long period rather than on any particular investment or any one year's performance.

As long as not all eggs are put in the same basket, the gains and losses of any investment will not significantly affect the portfolio's overall rate of return. Yields are bound to be high in some years and low in others, but the fluctuations will average out over a long period.

The NBIM posted a loss of 23.3 percent in 2008, but its overall annualized rate of return since 1998 has been above 10 percent.

Temasek has also ridden the rollercoaster. In 2009, it suffered a loss of 30 percent, but had earnings the next year of 43 percent. Overall, its rate of return on equity over the past decade is about 9 percent.

In 2011, the State Council, China's cabinet, approved a proposal to evaluate CIC's investments over a 10-year period. That means it will take yet another four years, or until its 2017 annual report comes out, before the CIC can be fairly evaluated based on its yield on a rolling basis over the previous decade. This fits CIC's role as a long-term investor.

A long-term evaluation system would change the incentive dynamics for CIC's decision-makers. In the long run, their investments would be more stable and the firm's yield would increase.

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