Slick presentation can't fend off sovereign fund questions
At first glance, the annual report published on Tuesday by the China Investment Corporation, the country's US$410 billion sovereign wealth fund, is an impressively slick document.
It has clearly been professionally produced. There are plenty of colour photographs of earnest-looking people in shirtsleeves holding important meetings in bright and tidy offices, creating the impression that the fund is a thoroughly up-to-date organisation, and double-page pictures of lushly irrigated crop fields, suggesting that CIC's investments benefit all mankind.
There are sections on 'culture and core values' and 'outreach activities', and buzzwords like 'integrity', 'commitment', 'prudence' and 'teamwork' are printed in bold. What's more CIC stresses its adherence to something called the Santiago principles, an internationally-agreed code of best practice for sovereign funds.
Obviously CIC is anxious to portray itself as a good corporate citizen, and not the sinister organisation many fear it to be, bent on wielding the baleful financial influence of an authoritarian government.
But it's not only the presentation that's impressive. CIC's investment performance looks pretty creditable too. Last year the fund's international portfolio claimed an investment return of 11.7 per cent. By comparison, Hong Kong's Exchange Fund managed a return of just 3.6 per cent.
On closer inspection of CIC's annual report, however, some doubts begin to seep in.
It wasn't just because the glossy double-page photograph of a particularly spectacular bridge, included presumably to illustrate CIC's prowess as an infrastructure investor, is actually a picture of the Millau Viaduct in southern France, a project completed three years before CIC was founded and with which the sovereign wealth fund has no involvement at all.
It was also that performance figure of 11.7 per cent, which just happens to be exactly the same as the fund's return in 2009; a remarkable coincidence, I'm sure you'll agree.
The coincidence is even more striking when you consider that 2009 saw a strong rebound in world financial markets following the financial crisis, while last year the rebound petered out.
Still, CIC has given some information about how it achieved its performance. It ran down its cash holding, from 32 per cent in December 2009, to just 4 per cent at the end of last year. Instead, it ramped up its holdings in alternative investments - hedge funds, commodity trading programmes and the like - from 6 per cent of its international portfolio to 21 per cent (see the charts, left).
Even so, if CIC's asset allocators and portfolio managers are as rigorously benchmarked as the annual report makes out, it is hard to see quite how they managed to turn in such a solid performance.
Let's assume that the members of CIC's asset allocation committee got in to the office on the first working day of January 2010 and immediately made their allocation decisions for the rest of the year.
Next let's assume that each sector performed in line with its most common benchmark - North American equities in line with the S&P500 index and so on.
Then over the course of the year, CIC's international portfolio would have struggled to return more than 7 per cent.
Part of the problem was that although global equities had a reasonable year - the S&P500 returned just short of 13 per cent, and Asia-Pacific stocks more than 14 per cent - 2010 was a tough year for corporate bond investors.
On top of that, alternative investments generally did poorly. The HFR global hedge fund index returned just 5.2 per cent, while many commodity trading programmes actually lost money, despite the run-up in key markets.
Of course, it's possible that CIC outperformed the benchmarks thanks to some canny investment decisions. Although its equity allocations were broadly in line with index sector weightings, the fund was overweight on resource stocks, which would have served it well. And CIC's managers may have been particularly adept at their selection of hedge funds.
Even so, 11.7 per cent is still a mighty impressive performance. So impressive, in fact, that you might wonder whether CIC's managers are taking on rather more risk than they are prepared to admit, or even whether they are not being entirely accurate when reporting their performance.
I'll be interested to see whether they return 11.7 per cent this year as well.