(Bloomberg) — China’s sovereign wealth fund is losing senior-level talent at one of the worst possible times.
Three of China Investment Corp.’s top executives have resigned since April, leaving the $941 billion fund without some of its most experienced managers during a period of historic volatility in global markets. The departures add to a steady exodus in recent years that has included at least 17 team heads and managing directors.
Conversations with former and current managers point to shrinking opportunities, sliding compensation competitiveness and rising restrictions, all of which erode CIC’s attractiveness as a government-owned institution trying to operate as a market-based investor. The departures have now become significant enough that they threaten to hurt the fund’s returns, according to Li Jie, head of the foreign reserves research center at Beijing’s Central University of Finance and Economics.
“There’s no doubt that CIC’s appeal to talent in the market has been declining,” Li said.
Work experience at the fund has brightened executives’ resumes as they seek new opportunities and challenges elsewhere, several people familiar with the matter said. All declined to be identified, citing a reluctance to be seen discussing sensitive information in public.
Representatives from CIC didn’t respond to requests for comment.
CIC, the world’s second-biggest sovereign wealth fund after Norway’s, embarked on a global hiring spree of investment professionals from Wall Street and elsewhere after an initial $200 billion of capital upon inception in 2007. The timing was good; after the credit crisis, many Chinese-born out-of-work executives in the U.S. were looking for a job.
Most Scarce Resource
The firm had 205 investment professionals managing its overseas portfolio as of June 30, 2019 (the latest figures available). Its most notable investments have included a large stake in Blackstone Group Inc., mining company Teck Resources Ltd. and a $13.8 billion purchase of Europe’s Logicor.
CIC’s overseas portfolio returned an average 6.1% annually in the 10 years through 2018, beating a long-term target set by the fund’s board. It gained 17% last year as global stocks rallied, Executive Vice President Zhao Haiying said in an interview in May.
Senior CIC leaders have long stressed the need to attract top talent.
In a 2017 article, Ding Xuedong, the former chairman, wrote that the sovereign wealth fund’s talent was its “most, most scarce” resource. Founding chairman Lou Jiwei also recalled how building a global portfolio from scratch hinged on the hiring progress.
“At the beginning, when there weren’t enough people, we had to rely on asset allocation to get beta,” he wrote in an internal book compiled by CIC in 2017 to mark its 10-year anniversary, which also featured Ding’s missive. “After realizing beta, we tried to seek alpha from various aspects,” Lou said, using the investment language for average returns and excess profit. “Without the people, you may not even have beta.”
Yet the strategic importance CIC placed on bolstering returns on reserves has only weakened after the State Administrat
ion of Foreign Exchange, or SAFE, the main agency managing reserves, also diversified its own investments in recent years, the Central University of Finance and Economics’ Li said.
Rising yuan volatility and geopolitical tensions mean there’s greater priority placed on the safety of reserves, rather than higher returns, he said. That in turn reduces the possibility of any new capital injections in the near term.
CIC has received little fresh capital to deploy after 2012, as the nation’s foreign-exchange reserves reversed their years-long surge, falling 22% from a peak in 2014. A plan considered by CIC’s management in 2018 to raise money independently by selling bonds overseas has never materialized.
Deals are also harder to find amid growing protectionism in countries from the U.S. to Australia, particularly as the ruling Communist Party’s increased emphasis on its leadership in state-owned companies blurs CIC’s longstanding message to the market that it only wants to be a financial investor and won’t seek control.
Diminished deal-making opportunities has left CIC’s investment professionals less motivated, people familiar with the matter said. At one point, CIC even discussed a plan to manage external money, although that idea was ditched due to regulatory and technical barriers, two former employees said.
“The success of sovereign wealth funds, as with any knowledge-based organization, hinges on teamwork, deep industry relationships and people,” said Abdiel Santiago, chief executive officer of Panama’s sovereign wealth fund Fondo de Ahorro de Panama. “Financial assets don’t run themselves, and when leadership and talent suddenly leave, the void results in a difficult road toward their replacement, and at potentially great opportunity cost.”
While it’s difficult to quantify the direct damage of manager departures on performance, it could be substantial. Susan Gao, who resigned in April, had consistently beaten the MSCI All-Country World Index with her Global Large Cap Value Equity Portfolio over the past 10 years, including by a hefty 19 percentage points between April 2013 and 2016.
CIC’s most senior management isn’t blind to the revolving door. Ding wondered why “some comrades left. Was our compensation not attractive?” he asked a colleague soon after his appointment in 2013. Ding viewed retaining talent so they could pass on their cumulative experience as his most important mission. “Is a pay rise an option?”
He got a long answer from Zhang Qing, who recounted the conversation in the 2017 book before himself resigning a few years later as executive vice president of CIC’s direct investment unit. Zhang cited reasons ranging from employees’ own inability to adjust to the job, incentive mechanisms that fail to properly reflect performance, highly educated staff doing “trivial work” and inadequate coordination between front, mid and back-office departments.
Another reason, according to the people interviewed, is limited promotion opportunities, particularly for those who have risen to managing director or department head level. Becoming an even more elevated company-level official, which is rare in itself, is more likely to lead to a pay cut rather than a rise given the tighter restrictions around senior cadres, typically appo
inted by the ruling Communist Party.
Efforts to increase pay have only been met by the Party’s disciplinary tightening. CIC in 2016 said it cut average staff expenses by 4% and started to link any pay rises to company performance after inspectors found that salaries at CIC were “rising too fast” and that “per-capita management costs are too high.”
Managing directors and department heads at CIC typically earn between 1 million yuan ($143,000) and 2 million yuan a year depending on performance, the people said. That’s higher than some government officials but a drop in the bucket versus pay on Wall Street.
Now with the coronavirus stamping its presence all over 2020, the prospects of any more money seem slim. There’s also speculation that the finance ministry, which owns CIC, is pondering a further pay cut to the fund’s front-office staff after their travel budget was downgraded last year and they were only allowed to fly coach.
CIC has also lost its position as the Chinese government’s only diversified global investment platform following the widening of SAFE’s investment scope and establishment of other government-backed vehicles like the Silk Road Fund. Fan Hua, the former head of CIC’s asset allocation department and a senior managing director who left in 2018, is now the CIO for equity investments of China Merchants Bank Co.’s wealth management subsidiary. Wang Ou, CIC’s former head of private equity, is now at China Renaissance Holdings Ltd. as a strategic consultant.
A better system that can retain talent is essential at CIC, because people can pass on “institutional memory” and help ensure past mistakes aren’t made in the future, former President Gao Xiqing said in the 2017 book. If an institution is too fluid, with employees leaving and new members frequently joining, that structure can be damaged.
“Over the past 10 years, that’s what we gained, and also what we lost,” he said.
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