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Long-Term Investing at The CIC
The latest annual report from the CIC reveals that the Chinese SWF is operating under a 10-year investment horizon. How's it doing that?
Consider these two comments from CIC leadership over the past two years:
1) In January 2011, Gao Xiqing, Vice Chairman and President of China Investment Corporation, was quoted in the Financial Times as saying:
Theoretically, we are a long-term investor, but you cant really function on a ten-year horizon.
2) In the CICs latest annual report, Lou Jiwei, Chairman and CEO of the CIC, had this to say:
In January 2011, CICs Board of Directors decided to extend our investment horizon to 10 years to better reflect our investment approach as a long-term investor. And we accordingly made appropriate adjustments to our strategic asset allocation, tactical asset allocation and risk management.
In short, in January 2011, the President of the CIC was saying publicly that the fund could NOT operate on a ten-year time horizon... just as the fund was being asked by the Board to operate over a ten-year time horizon. Huh?
Im not quite sure whats going on here, but I'm guessing this internal discord is a function of the operational and managerial challenges facing long-term investors. It's easy for the Board to ask for a 10-year horizon, but it's very challenging for the management to execute on that request; they simply don't know how to implement a long-term investment strategy within the traditional institutions of modern finance. What to do? You go outside those traditional institutions.
For example, heres a description of how the CIC actually set about to achieve this 10-year investing horizon in late 2011:
In 2011, we built up our long-term asset portfolio and weighted it toward long term assets. We steadily built positions in private equity investments across various industries, especially those in emerging markets. We also diversified our investment base through direct investments or coinvestments, invested selectively in quality credit assets and enhanced our real estate portfolio to pursue stable cash returns.
We continued to make direct investments in oil and gas, mining and infrastructure to gear investments toward lower risk assets, such as steady return assets and resource-related assets. In 2011, CIC completed several direct investments or coinvestments.
In other words, a long term investor is one that has more direct investments with less diversification; that's not exactly something MPT would call for. Anyway, for some additional (and complimentary) ideas as to how a long-term horizon can be implemented, read my post from yesterday.