China Investment Corp (CIC) filed a 13-F Holding Report with the Securities and Exchange Commission (SEC) on Feb. 5, 2010, another action that reinforces the sovereign wealth fund’s (SWF) commitment to transparency and responsible citizenship in the global financial community. The SEC requires a 13-F HR to be filed by institutional investment managers with more than USD100 million worth of assets. For the year ended Dec. 31, 2009, CIC reported 84 positions in US-listed companies with a total market value of USD9.6 billion.

This filing is a positive from a public relations perspective and makes for good geopolitical optics. The real significance is what it suggests China can do with its USD2.7 trillion of foreign currency reserves. CIC manages only a small portion of these reserves. Rumored to soon be receiving another USD200 billion to invest, CIC’s growth has significant implications for many asset classes in many regions.

Despite CIC’s very public activities–in addition to International Monetary Fund-sponsored negotiations of a code of conduct for state-sponsored investment managers–the Chinese SWF and its peers will still be dogged by questions about ownership and intent. Equity ownership of publicly traded companies, among other asset classes, by what are essentially extensions of the state–the management and board of the CIC, for example, ultimately reports to the State Council of the People’s Republic of China–has become anathema in the West over the last four decades.

The primary fear is that these entities will act at the behest of political leaders rather than investment professionals and in pursuit of aims not related to financial or economic gain. The record reveals, however, that SWFs, in the more than 50 years since the first one was founded (the Kuwait Investment Authority in 1953), have acted as responsible global investors. Much scrutiny has been drawn to them because of their proliferation during the last decade, when petroleum exporters and manufacturing exporters alike benefitted from credit-driven consumption in the West, particularly the US.

What’s different now is that rather than the subject of whispered chats among the global financial elite SWFs are the focus of weekly magazine cover stories and segments on nightly news broadcasts. They’ve gone popular, and that means politicians–as was the case with state-owned entity Dubai Ports World and its attempt to buy Peninsular & Oriental Steam Navigation Company–have plenty of opportunities to exploit these foreign investors for short-term gains.

CIC, however, has never tried to lay low, in the manner of the Abu Dhabi Investment Authority (ADIA), purported to be the largest SWF in the world with assets under management of USD875 billion. CIC’s initial allocations, made even before it had a name or was even formally constituted under Chinese law, were high-profile investments in Morgan Stanley (NYSE: MS) and the initial public offering (IPO) of The Blackstone Group (NYSE: BX).

CIC was actually trying to get recognized as a responsible source of liquidity and stability when it made these moves. Chairman and CEO Lou Jiwei has stated from CIC’s founding in 2007 that the SWF wasn’t interested in gaining control of the companies in which it invested. The focus from the beginning has merely been to generate long-term returns.

These investments in US financials didn’t work out as envisioned–the corrosiveness of subprime mortgages, credit default swaps and synthetic securities had yet to be fully realized in late 2007–and CIC has taken plenty of criticism at home for them. Whether because of these early hiccups or for some sense that trouble was on the horizon CIC kept its powder relatively dry during 2008.

But once the worst of the global financial/economic crisis had passed, however, the now USD300 billion-plus SWF stepped up as the most aggressive institutional actor on the global financial stage. Its recent public filing, its first, reveals a great deal about its investment strategy, though it only includes most of CIC’s US holdings.

According to some estimates, the USD9.6 billion reported on the 13-F represents just 10 percent of CIC’s total international portfolio. It also omits the Blackstone investment and the 2007 Morgan Stanley deal, though it does include a 2009 equity purchase. CIC’s stake in American Electric Power’s (NYSE: AEP) wind energy unit is not included because the deal hasn’t yet cleared all regulatory hurdles. CIC also undoubtedly owns real estate, positions in private equity ventures and fixed-income investments that wouldn’t appear in this disclosure.

As well, equity investments focused on foreign markets such as Kazakhstan, Mongolia and Indonesia aren’t included; such positions account for an estimated USD5 billion. But this glance at CIC’s portfolio reveals several broad trends, name exposure to resources and financials, although the balance is shifting rapidly in favor of resources. CIC got serious about deploying its capital in the second half of 2009, diversifying its exposure in terms of sectors and geography.

CIC’s largest single reported position is its enormously successful investment in Canada-based mining giant Teck Resources (TSX: TCK-B, NYSE: TCK), which accounts for 38 percent of its “listed US” portfolio. This is the highlight of CIC’s heavy emphasis on resources, particularly metals and mining. CIC also has significant gold exposure via miners and SPDR Gold Trust (NYSE: GLD).

CIC bought 17.2 percent of Teck for USD1.5 billion; as of Dec. 31, 2009, that stake was worth USD3.4 billion. Not only has the deal been financially successful. In economic terms China has established access to one of the world’s top producers of copper, metallurgical coal and zinc as well as molybdenum and specialty metals, all of which it needs in great supply to sustain the growth necessary to satisfy a potentially restive population.

The 13-F confirms, too, CIC’s status as a passive investor; most of its US equity exposure comprises small stakes or positions in sector or geographic-focused exchange-traded funds.

True to its stated aspirations, CIC has snapped up small stakes in a number of companies and distributed funds to a number of outside managers for even broader exposure. Despite this flurry, the bulk of CIC’s assets remain locked up with domestic Chinese financials. This shift from financials, domestic and foreign, toward global resource companies will likely accelerate should the rumored second USD200 billion infusion of capital take place.

For more on China, CIC and Canada–and specific ways to play the prevailing trends–see the February 2010 Canadian Edge feature article, Canada’s Eastern Edge.

Dig In

Want to know more about how to play emerging China’s relationship with Canada? Join Roger Conrad in sunny San Diego, California, April 23-24 for the 2010 Wealth Society Member Summit. You’ll have a chance to sit down with Roger one-on-one to talk about where to find the best ideas to generate total returns as Canadian income trusts convert to high-yielding corporations and how to position your portfolio for the year ahead.

Join Roger and his colleagues GS Early, Elliott Gue, Yiannis Mostrous, and Benjamin Shepherd at the historic Hotel del Coronado–one of the top 10 resorts in the world according to USA Today, one of the top 20 hotel/spas in the world according to Travel + Leisure, and the No. 2 place in the world to get married, according to the Travel Channel.

And on April 23-24, Coronado Island will also be the best place in the world for relaxation and profit. We’re expecting 72 degrees, sun and fun. You may find all details at www.InvestingSummit.com.

Call 1-800-832-2330 (between 9:00 a.m. and 5:00 p.m. EST Monday through Friday) or go  online now to reserve your seat at the table. Space is limited.

The Roundup

Earnings season is underway for Canadian Edge Portfolio recommendations. Conservative Holding and February High Yield of the Month Bell Aliant Regional Communications Income Fund (TSX: BA-U, OTC: BLIAF) got things started with an encouraging set of numbers, though we’re waiting until the company’s first-quarter conference call in May for conversion details.

Fellow Conservative Holdings Brookfield Renewable Power Fund (TSX: BRC-U, OTC: BRPFF) and RioCan REIT (TSX: REI-U, OTC: RIOCF) report today; we’ll have a full accounting in next week’s Roundup.

Here’s what happened with Bell Aliant, as well as estimated reporting dates for Conservative and Aggressive Holdings and highlights from How They Rate.  

Conservative Holdings

Bell Aliant Regional Communications Income Fund (TSX: BA-U, OTC: BLIAF) will convert to a corporation in late 2010, pending a unitholder vote slated for June 16. In a conference call to discuss fourth-quarter and full-year 2009 results management repeated a prior forecast that “a reduction in the current distribution is expected,” but stated that details would have to wait until the first quarter conference call in May, saying only that the board was still determining parameters.

Management reduced operating and capital costs by over CAD150 million in 2009 on a permanent basis, downsizing its workforce and updating the reliability and speed of its network.

The result was a 25 percent boost in distributable cash flow over 2008’s fourth quarter, adding up to a full-year boost of 8 percent. That translated into strong distribution coverage, with a fourth quarter payout ratio of 50 percent based on free cash flow (after capital expenditures). The full-year payout ratio of distributions plus capital expenditures was just 85 percent.

The number of customers using basic telephone service dropped by 44,000, a slightly higher rate than a year ago as competition from cable providers grew and the economy remained soft. Local phone service revenue fell 4.1 percent, while long distance sales dropped 8.6 percent year-over-year and 5 percent from the end of 2008.

The company did a much better job of hanging onto its enterprise customers. Internet revenue growth was a steady 7.2 percent, as an ongoing build-out extended high-speed network coverage to 77 percent of its territory. Operating margin rose four percentage points over year-earlier levels to 46.5 percent, indicating efficiencies have well outpaced line losses despite the weak economy. Bell Aliant Regional Communications Income Fund is a buy up to USD27.

Just Energy Income Fund (TSX: JE-U, OTC: JUSTF) last week announced plans to convert to a corporation; the arrangement will be voted on during the company’s June 29, 2010, annual meeting. Management plans to maintain the current distribution level of CAD0.1033 per share.

In its statement announcing the move, management noted that its preparations for conversion actually began in early 2008, when it stopped hiking distributions despite impressive growth in its operations. Just Energy did pay an annual top-up distribution. However, this early focus on its post-trust life has now set it up well to maintain a high growth, high dividend course. Just Energy Income Fund is a buy up to USD14.

Pembina Pipeline Income Fund (TSX: PIF-U, OTC: PMBIF) will devote approximately 60 percent, or CAD152 million, of a planned 2010 capital budget of CAD240 million on work at the Nipisi and Mitsue pipeline projects. Nipisi and Mitsue came about specifically to serve demand for  diluted heavy oil take-away from and diluent supply to the region north of Slave Lake, Alberta.

This emphasis illustrates the importance to Pembina management of continued oil sands and other heavy oil development. Regulatory approval is anticipated by September 2010. Approximately 80 percent of the engineering is complete, and Pembina is on schedule to complete the projects in mid-2011.

The two pipelines, estimated to cost CAD440 million combined, remain on budget and to date the company has entered into contracts that will generate about 60 percent of the cost estimate. Pembina Pipeline Income Fund is a buy up to USD18.

• AltaGas Income Trust (TSX: ALA-U, OTC: ATGFF)–February 26
• Artis REIT (TSX: AX-U, OTC: ARESF)–March 16 (confirmed)
• Atlantic Power Corp (TSX: ATP, OTC: ATLIF)–March 29 (confirmed)
• Bell Aliant Regional Communications Income Fund (TSX: BA-U, OTC: BLIAF)–February 3 (confirmed)
• Bird Construction Income Fund (TSX: BDT-U, OTC: BIRDF)–February 12
• Brookfield Renewable Power Fund (TSX: BRC-U, OTC: BRPFF)–February 9 (confirmed)
• Canadian Apartment Properties REIT (TSX: CAR-U, OTC: CDPYF)–February 24 (confirmed)
• CML Healthcare Income Fund (TSX: CLC-U, OTC: CMHIF)–March 4
• Colabor Group (TSX: GCL, OTC: COLFF)–February 25
• Davis + Henderson Income Fund (TSX: DHF-U, OTC: DHIFF)–February 24
• IBI Income Fund (TSX: IBG-U, OTC: IBIBF)–February 12
• Innergex Power Income Fund (TSX: IEF-U, OTC: INRGF)–March 16
• Just Energy Income Fund (TSX: JE-U, OTC: JUSTF)–February 11 (confirmed)
• Keyera Facilities Income Fund (TSX: KEY-U, OTC: KEYUF)–February 18 (confirmed)
• Macquarie Power & Infrastructure Income Fund (TSX: MPT-U, OTC: MCQPF)–March 2 (confirmed)
• Northern Property REIT (TSX: NPR-U, OTC: NPRUF)–March 17 (confirmed)
• Pembina Pipeline Income Fund (TSX: PIF-U, OTC: PMBIF)–March 3
• RioCan REIT (TSX: REI-U, OTC: RIOCF)–February 9 (confirmed)
• TransForce (TSX: TFI, OTF: TFIFF)–February 25 (confirmed)
• Yellow Pages Income Fund (TSX: YLO-U, OTC: YLWPF)–February 11 (confirmed)

Aggressive Holdings

Provident Energy Trust (TSX: PVE-U, NYSE: PVX) will pay USD5 million toward a total USD18 million cash portion of a settlement of lawsuit brought by Quicksilver Resources (NYSE: KWK) against Provident and its former affiliate BreitBurn Energy Partners LP (NYSE: BBEP). Provident Energy Trust is a buy up to USD8.

• Ag Growth International (TSX: AG-U, OTC: AGGZF)–March 16
• ARC Energy Trust (TSX: AET-U, OTC: AETUF)–February 11
• Chemtrade Logistics Income Fund (TSX: CHE-U, OTC: CGIFF)–February 19
• Daylight Resources Trust (TSX: DAY-U, OTC: DAYYF)–March 2 (confirmed)
• Enerplus Resources Fund (TSX: ERF-U, NYSE: ERF)–February 26
• Newalta (TSX: NAL, OTC: NWLTF)–March 5
• Paramount Energy Trust (TSX: PMT-U, OTC: PMGYF)–March 10
• Penn West Energy Trust (TSX: PWT-U, NYSE: PWE)–February 18
• Peyto Energy Trust (TSX: PEY-U, OTC: PEYUF)–March 10 (confirmed)
• Provident Energy Trust (TSX: PVE-U, NYSE: PVX)–March 11
• Trinidad Drilling (TSX: TDG, OTC: TDGCF)–February 26
• Vermilion Energy Trust (TSX: VET-U, OTC: VETMF)–February 12

Oil and Gas

Trilogy Energy Trust’s (TSX: TET-U, OTC: TETFF) conversion to corporation is complete; investors approved the move in a vote, and the court of jurisdiction granted final sanction on the arrangement.

Trilogy Energy Corp common shares will commence trading on the Toronto Stock Exchange under the symbol TET on or about Wednesday, February 10, at which time the trust units will be delisted from the Toronto Stock Exchange. We’ll provide a US over-the-counter symbol as soon as possible. Trilogy Energy Trust/Trilogy Energy Corp is a buy up to USD10.

Electric Power

Northland Power Income Fund (TSX: NPI-U, OTC: NPIFF) will build a CAD700 million, 261-megawatt natural gas-fired power plant to provide baseload power to the Saskatchewan energy system.

All power produced by the plant will be sold to the Saskatchewan Power Corporation under a 20-year power purchase agreement (PPA). During the construction phase Northland will receive monthly payments to cover all fixed costs and investment returns. The PPA also provides protection against changes in the market price of natural gas; fuel costs are passed through to SaskPower. Northland Power Income Fund is a buy up to USD12.

Natural Resources

Canfor Pulp Income Fund (TSX: CFX-U, OTC: CFPUF) reported that Canfor Pulp LP, of which it owns 49.8 percent, generated distributable cash flow of CAD22.3 million in the fourth quarter of 2009; the LP and the income fund declared a total of CAD0.14 per unit in distributions during the period.

Steady demand for pulp and tight supplies gave management plenty of scope to boost prices; pulp was going for CAD770 per ton in September before rising to CAD830 in December. Announced prices for were CAD850, for February CAD880 per ton. Canfor Pulp Income Fund is a hold.

Rogers Sugar Income Fund’s (TSX: RSI-U, OTC: RSGUF) fiscal first-quarter 2010 results (for the 12 weeks ended Dec. 31, 2009) confirm that sugar fundamentals are sweetening and that the company’s ability to amply cover its dividend will persist well after Jan. 1, 2011.

Distributable cash was CAD18.8 million, up slightly from CAD18 million in fiscal 2009; the fund distributed CAD10 million. Rogers’ adjusted gross margin rate was CAD18.32 higher than a year ago.

Management provided the following on the issue of conversion: “Whether we convert to a corporation and as a result pay corporate income taxes or continue with our income trust structure beyond 2010 and become subject to distribution tax, we currently anticipate paying dividends or distributions at levels that would provide an after tax distribution equivalent to that currently enjoyed by our Canadian taxable Unitholders.” Rogers Sugar Income Fund is a buy up to USD5.

Energy Infrastructure

Enbridge Income Fund (TSX: ENF-U, OTC: EBGUF) reported cash available for distribution for the fourth quarter of CAD21.9 million and for 2009 of CAD90.1 million, roughly flat with fourth-quarter and full-year 2008 figures of CAD22.6 million and CAD91.2 million.

The full-year 2009 comparison suffers because the company booked a CAD6.1 million bankruptcy settlement in 2008. On-the-ground operations actually produced higher cash flow, driven mainly by the completion of phase 1 of the Saskatchewan System expansion.

An independent committee is currently reviewing a conversion proposal that includes recommended completion date of no later than Jan. 1, 2011. No date has been given for the completion of the committee’s deliberations. Enbridge Income Fund is a buy up to USD12.

Financial Services

CI Financial (TSX: CIX, OTC: CIFAF) reported gross retail sales of CAD759 million and net sales of CAD100 million for the month of January. Total fee-earning assets as of January 31 were CAD86.6 billion. CI Financial is a hold.

Food and Hospitality

A&W Revenue Royalties Income Fund (TSX: AW-U, OTC: AWRRF) reported same-store sales growth of 0.3 percent for the fourth quarter but rose 1.5 percent for the year. Distributable cash for the quarter was up 3.3 percent to CAD6.8 million; it was up 3.2 percent for 2009 to CAD20.9 million.

A&W achieved a seventh consecutive year of same-store sales growth despite unfavorable economic conditions. A&W Revenue Royalties Income Fund is a buy up to USD15.

Health Care