SWF Performance in the ‘Great Recession’

Ashby Monk

Foreign Policy has just published a short article by Veljko Fotak and Bill Megginson in which the authors describe and explain the severity of the losses suffered by SWFs. As they note:

“…sovereign wealth funds lost a staggering $66.88 billion on their publicly disclosed investments and experienced a total return of negative 53.23 percent from the date the investments were made through March 27, 2009.”

The authors see more than just poor investment decisions at work:

“It’s not simply the managers’ fault. These are, after all, state-owned investment funds. As our data suggest, poor stock picking could have been the result of pressures that forced managers to invest in distressed industries and firms for political reasons.”

Referring to their data (in the recent Monitor report they contributed to), I also saw evidence for political influence over SWFs. If true, this would surely exaggerate the losses made by these SWFs.

I think it’s an interesting story…but I was actually surprised to see it in Foreign Policy, which is a magazine (and website) I read regularly. I think of FP as a provocateur, publishing articles that force the reader to reconsider firmly held beliefs and challenge conventional points of view. While this SWF article is interesting, it confirms what many in the west already hold to be a truth: SWFs are inherently political and this politicization creates inefficiencies (e.g. losses).

This got me thinking as to how I might write a short article on politicized SWF investment that was challenging and provocative. After a solid 30 seconds of reflection, I decided I would have written an article about how political influence can lead to SWF investment outperformance. And I think I’d have some evidence to back it up.

I’m thinking of a large SWF. This SWF has two distinct sides to its operations. On the one hand, it has its global investment activities, which represent its commercial investment operations. On the other hand, it has its domestic operations, which represent its investments in domestic and state-owned firms. In order to dampen western anxieties about political investing, this SWF keeps a strict “firewall” between the two sides of the fund. I’m of course referring to the China Investment Corporation:

“CIC maintains a strict operational firewall between its global investment activities and those of Central Huijin, which represents the State’s interest in domestic, state-owned financial institutions.”

In short, Central Huijin, a wholly owned CIC subsidiary, was set up to invest exclusively in domestic state-owned financial institutions on behalf of the state to enhance the value of state-owned financial assets and improve the governance of SOEs. While the objective over the long-term may be to make money, there are clear and obvious political undercurrents.

According to the conventional logic (highlighted in the FP article), the ‘commercial’ side of the CIC should have outperformed the ‘political’ side. So what happened? According to the CIC’s first annual report, the CIC’s global portfolio returned -2.1%. This is actually pretty darn good considering the massive declines in global stock markets (S&P 500 was down roughly 40% for the year). However, as Lou Jiwei notes in the report:

“Combined with Central Huijin’s excellent performance, CIC provided its shareholder with an overall return on registered capital of 6.8%.”

In other words, Central Huijin had an amazing year. Indeed, looking back to page 47 of the annual report, we see that the CIC is no longer a “$200 billion SWF,” it is a “$298 billion SWF.” This sudden growth is due to the domestic, politicized portfolio managed by Central Huijin.

If the FP wants provocation, here it is: The arm of the CIC representing the State’s interests outperformed the commercial arm in 2008. The very idea goes against conventional theories of governance and financial performance. Now I’m sure there are numerous points that are debatable about the above. We could also spend another 1000 words speculating as to why Huijin did so well. But that’s beside the point; this post was simply an attempt to get you thinking about these issues in a new way.

5 Responses to “SWF Performance in the ‘Great Recession’”


  1. 1 rien huizer August 25, 2009 at 3:08 am

    Central Huijin is 100% owned by the still enigmatic CIC. Huijin owns middle 20-50% stakes in the big four and just below 50 in CDB. These investments are accounted for using the equity method, resulting in CIC deriving a proportional share of these banks’ net profits. Re also the 2008 paper by Collaro, it is still quite unclear what Huijin and a quasi-reserve fund are doing under the same roof. Two suggestions: During times of large scale gvt stimulus in China, bank balance sheets can grow very fast, so fast that asset growth outstrips regulatory capital (and capital requirements may go up as well). CIC may well be the entity that will do that and it has ample liquidity for that as well, if it does not take too much risk in its SWF capacity.No need for explicit state intervention. Which has its consequences for CIC’s investment horizon. The other explanation: CIC appears to be a “non man’s land” within the various arms of Chinese State finance and its various political tribes, under joint supervision. No one gets the bank profits for a while.

    SAFE continues to be a much bigger investor (probably with better performance) and the Social Security fund is also growing. CIC sans Huijin has shrunk, while it has to earn the interest on the bonds the state issued to the PoBC as payment for the FX used to fund CIC. I guess one has to be an expert on Chinese accounting and privy to non-public data to understand the financials.

    And then that firewall. See how US bank regulators cope with that when CIC becomes less of a bank holding company and more of an instrument of industrial policy, or even foreign policy..

    • 2 Ashby Monk August 25, 2009 at 1:06 pm

      Rien: Your point above is interesting. I also caught that the CIC has taken over the supervision of China Reinsurance’s management team from the insurance regulator. It’s an interesting mix of responsibilities!

  2. 3 MMcC August 25, 2009 at 7:40 am

    We’re still working through our analysis of the 2008 CIC report (I’ll send a copy of our work to Ashby sometime in the next two weeks, barring disaster or client demands, if that’s not repetitive). Probably 60%+ of the USD26.3bn that CIC took as income from Huijin/Jianyin was dividend and share sale income. The equity method leaves us guessing where the write-ups were taken but, given the number of subsidiary securities firms able to add to reserves and pay down debt after 2007’s record earnings, I’m not expecting to be shocked.

    CIC has now moved to a dividend payment model, so the coupon payment pressure is off. Both Huijin and Jianyin are adding more color to their restructuring plans and I’m certainly feeling more confident that I have a handle on their relationships with CIC than I did a year ago. I’m not sure the hybrid domestic/international design was ever going to become a Platonic ideal but I’m a lot more confident in its ability to pass foreign (particularly non-US) sniff tests now than I was in early 2008.

    SAFE, by our estimates, got burned a lot worse than CIC on its foreign portfolio last year and new management there appears much less concerned about dollar depreciation or diversification than has been realized abroad. I don’t doubt they’ll continue to make marginal purchases of foreign non-bonds but I think the real action will be led by CIC. Another USD200bn transfer to CIC in the next 12 months will not come as a shock.

  3. 4 Ashby Monk August 25, 2009 at 1:13 pm

    The switch to the dividend payment model was very interesting. I see this as tacit approval of the CIC’s operations and performance to date (i.e. no longer requires discipline of liabilities). This, in turn, jives with your prediction of another capital injection. Thanks for the comment, Michael. Please do send me your analysis (when you have it).


  1. 1 Informed Trading « Oxford SWF Project Trackback on August 31, 2009 at 2:57 pm

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This website is a project of Professor Gordon L. Clark and Dr. Ashby Monk of the School of Geography and the Environment at the University of Oxford. Their research on sovereign wealth funds is funded by the Leverhulme Trust and The Rotman International Centre for Pension Management.

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