For many investors who don't have the benefit of 20 years of experience in Asia like I do, figuring out what Beijing is up to is both puzzling and difficult.
But a handy little tool called a "Form 13F" can help.
In case you're not familiar with it, the 13F is a disclosure document that the U.S. Securities and Exchange Commission (SEC) requires institutional-investment managers to file when they hold $100 million or more of certain U.S.-listed stocks.
China's $300 billion sovereign wealth fund (SWF) – the China Investment Corp. (CIC) – just filed its first-ever 13F with the SEC, revealing that it purchased about $9.6 billion worth of U.S. stocks last year.
And it confirms much of what we've been telling you since the global financial crisis began – namely that China would take advantage of the crisis by purchasing beaten-down stocks, resources, and hard assets … and in a big way.
Even more important, this filing hints at what China is likely to do next – an insight that will help investors figure out where to put their money in order to maximize their personal profits.
China's First Close-Up
CIC holds 84 securities, according to its 13F filing. What's more, it shows there was significant buying throughout 2009 – with a special focus on Exchange-Traded Funds (ETFs), which now account for 25% of CIC's self-invested U.S. shares.
The fund began 2009 with a mere $297.5 million in assets, and ramped up its investment activities during last year's third quarter, when global securities prices were especially appealing. CIC ended the year with total U.S. stock holdings worth $9.63 billion – a staggering 3,136% increase.
As mind-boggling as that total is, keep in mind that it's only part of the picture: In fact, it's probably a fraction of the total invested – if you include so-called "external mandates" or specialized investments outside traditional sources, such as CIC's $3.3 billion investment in The Blackstone Group LP (NYSE: BX) a few years back. That investment (which we talked about extensively) was made through an investment titled " Beijing Wonderful Investments Ltd" which sounds a lot more poetic than the names Enron Corp. came up with for similar special-purpose partnerships a few years back. Among them: such as Jedi, Chewco and LJM1 and LJM2, to list a few.
According to CIC's 13F, the two largest holdings included a $1.77 billion stake in Morgan Stanley and holdings valued at $3.54 billion in Teck Resources Ltd. (NYSE: TCK) – which, not surprisingly (given China's immense appetite for raw-materials commodities), is a diversified exploration giant with significant interests in copper, metallurgical coal, zinc and other energy sources.
It's more than a mere financial snapshot: Investors who were unsure of China's direction can look to this new disclosure for guidance.
For instance, commodities-related investments clearly remain a central strategy for Beijing. NASDAQ stock-market data shows that CIC is the third-largest holder of United States Oil Fund LP ETF (NYSE: USO); the SWF purchased 2.0 million shares – about 3.48% of the total number outstanding – with a value of about $78.6 million [For additional details on CIC's holdings, check out the graphic that appears below.]
A Clear Portrait
For years, many pundits have portrayed China as an inexperienced and unsophisticated investor. The disclosure statement clearly alters that picture. Indeed, this first-ever Form 13F underscores that CIC's management team not only understands what it's doing, but why.
It also paints a picture that suggests China's investment managers have a remarkably sophisticated grasp of the markets.
For example, the data demonstrates that CIC adjusted its strategy at last year's midpoint: It shifted its general emphasis away from financial-services stocks and into global-resources plays. At the same time, however, CIC still invested a staggering $714 million in top-tier investment manager BlackRock Inc. (NYSE: BLK), thanks to a December merger with Barclay's Global Investors, a deal that transformed BlackRock into the world's largest money manager.
As you might expect, the filing also detailed a number of smaller holdings. Those holdings ran the gamut, and included consumer plays, as well as investments in the IT, telecom, industrial and pharmaceutical sectors.
With all this new insight, the next question most investors will ask is: "What's next?" That's where my experience comes into play.
Four Things to Remember About China's Next Moves
My sources suggest – and media reports seem to agree – that CIC is probably going to receive another $250 billion or more to invest in the months ahead, with most or all if it coming from China's estimated $2.4 trillion in reserves. Barring any change in U.S. Federal Reserve policies, I think it's a foregone conclusion that Beijing won't be buying more U.S. Treasuries – especially since China has reduced its holdings of federal debt by $10 billion since just November.
Given the new insights we've received from the 13F filing (insights that confirmed the hypotheses that I've shared with all of you), I think we can make some safe assumptions about what's going to happen next. Here are the top four things to watch for:
- China will continue to invest in hard assets and other emerging markets: These two go hand-in-hand, to some extent, and underscore China's long-term vision. Beijing is looking past the current financial crisis and is investing for the next century, which is a key element of what China's all about. This mandate will include a wide variety of investment opportunities in South America, as well as such surrounding Asian Rim countries as Indonesia, Vietnam, Cambodia, and even Thailand, for example. Resources will be key targets in each of those regions, as will infrastructure – especially when it comes to moving the products it wants into the export chain … straight to China. Africa and the Middle East will be on the radar, but not to the same degree. That's why companies like Vale (NYSE ADR: VALE) made the grade as one of CIC's core holdings.
- China will also invest heavily in those companies that feed the growing country's "appetite:" Global brands will be a big focus, as the country works to create a domestic market for its own products – and for top brands made by other "foreign" companies. Two great examples, which both show up on the 13F: Apple Inc. (Nasdaq: AAPL) and The Coca-Cola Co. (NYSE: KO). At the same time – given Beijing's vision – I believe China will continue to invest spectacularly in alternative energy. For the country to keep growing it will need power – hence such investments as the $50 million it pumped into SouthGobi Energy Resources Ltd for instance.
- China could create a private equity resurgence all by itself: Pundits who poke fun at China for making such high-profile and expensive flubs as their investments in The Blackstone Group LP (NYSE: BX) and other private-equity groups are missing the point. China could care less that it spent billions and hasn't received a return. What Beijing really wants is "how-to" insight, and access to deal flow – hence such investments as its foray into the Apax Partners' Europe VII LP fund, for example, is access to deal flow. China has bought itself a seat at the most expensive poker table in the world – and now it's got dealer's odds by virtue of being able to see some of the world's most sophisticated private deal flow. In my way of thinking, that's a pretty shrewd bet.
- China will begin hiring Western money management firms: This is likely to include some really high profile names. In similar fashion to the private equity "tuition" they've paid, China's investment managers are keen to learn from the best – which means hiring the best, and then observing at close range how those experts do things and why. Part of nearly every hiring agreement in Asia of this nature includes the strategic placement of a few "executives" who watch the shop and report back to headquarters (Beijing) how things are getting done. I recall many similar arrangements during the Japanese buying binge of the late 1980s, when it was common for the target firm to accept a few new "employees" as part of the buyout deal.
Just as the Japanese acquisition wave of the late 1980s created some superb opportunities, so, too, will China's buying binge this time around.
The important thing to remember is that this game is far from over. China is building itself up for the next century – not next quarter – which is why documents like this one confirm what we already know: Monthly swings are nearly irrelevant to China's way of thinking.
After all, what's a few billion dollars between friends – especially when you can identify in advance where to put it.
[Editor's Note: Twenty-one picks. Twenty-one winners. For the past year, Money Morning's Keith Fitz-Gerald has maintained a perfect record with his Geiger Index advisory service. Every trade turned a profit. That's remarkable in any market, but given the current circumstances, the service offers unparalleled security and profit opportunities. To find out what other investors have to say about the service, as well as the secret ingredient that makes the Geiger Index go, read on.
For more details on the specific stocks that China's sovereign wealth fund purchased, please click here to check out this related story that appears elsewhere in today's issue of Money Morning.]
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- Securities & Exchange Commission (SEC):
- University of Cincinnati College of Law:
Section 13 Securities
- Money Morning Special Report:
Three Ways to Profit From Sovereign Wealth Funds – the "Next Wall Street"
China Investment Corp. 2009 13F
Beijing fund to hike stake in Blackstone: source
About the Author
Keith Fitz-Gerald has been the Chief Investment Strategist for the Money Morning team since 2007. He's a seasoned market analyst with decades of experience, and a highly accurate track record. Keith regularly travels the world in search of investment opportunities others don't yet see or understand. In addition to heading The Money Map Report, Keith runs High Velocity Profits, which aims to get in, target gains, and get out clean, and he's also the founding editor of Straight Line Profits, a service devoted to revealing the "dark side" of Wall Street... In his weekly Total Wealth, Keith has broken down his 30-plus years of success into three parts: Trends, Risk Assessment, and Tactics – meaning the exact techniques for making money. Sign up is free at totalwealthresearch.com.