One of the principal pillars of Abu Dhabi’s much-envied economic stability – and an important factor in the IMF’s reassuring statement, made in 2015, that the UAE has financial assets that are capable of sustaining it for more than 20 years – is its principal sovereign wealth fund (SWF).
Abu Dhabi began its national hedging exercise – by which it has diverted fiscal surpluses over the years in order to future-proof itself in any significant alteration of its economic circumstances – nearly 50 years ago.
The Financial Investments Board was established in 1967 as part of the Abu Dhabi Ministry of Finance, and was charged with deploying the emirate’s excess capital in pursuit of its strategic economic objectives. For nearly a decade the board acted as the principal government instrument by which Abu Dhabi invested its sovereign wealth with a view to generating long-term value, but in 1976 its role came to an end with the creation of the Abu Dhabi Investment Authority (ADIA).
Over the intervening decades ADIA has established itself as the second-largest SWF in the world, according to the Sovereign Wealth Fund Institute (SWFI), holding an estimated $773bn of assets as of 2015. ADIA itself does not disclose assets under management, but it has been more forthcoming regarding its strategy.
Over the years ADIA has established a broad portfolio, the largest component of which is equities derived from developed markets (which ADIA’s risk profile targets at between 32% and 42% of the total), followed by emerging market equities (10-20%) and government bonds (10-20%). It has also established smaller holdings in areas such as real estate (5-10%), credit (5-10%), alternative investments (comprising hedge funds and managed futures, 5-10%), infrastructure (1-5%) and small cap equities (1-5%). In terms of geography, ADIA’s investment policy is weighted towards North America (which it targets at 35-50% of its portfolio), followed by Europe (20-35%), developed Asia (10-20%) and emerging markets (15-25%).
Given the size of ADIA’s global involvement, changes in focus are of considerable interest to the international investment community. Historically, SWFs around the world have had a reputation for discretion in their transactions, but in recent years there has been a trend towards greater transparency and disclosure. ADIA is part of this general movement.
Through its annual reviews and public disclosures, therefore, the broad trends in ADIA’s growth can be readily discerned, and in recent years two developments have been particularly striking. The first concerns its internal structure. The fund has traditionally made use of a relatively large number of external fund managers to effect its transactions, and it continues to do so.
However, proportionally, they are playing a smaller role than has been customary, with the percentage of ADIA’s externally managed assets declining to 65% in 2014 from 75% a year earlier, according to the fund’s annual report.
This trend has come about as a result of ADIA’s move over recent years to strengthen its in-house investment and analytical expertise, an effort which has seen structural and personnel changes across the investment fund’s divisions.
In 2014 the fund appointed its first global head of research, who in 2015 oversaw the process of establishing a centralised research team that will henceforth supplement the activities of the departmental research units.
In July 2015 ADIA announced that it had hired Hisashi Kuroda as head of its internal equities department in Japan, further strengthening its Asian staff with an appointee with 20 years’ experience in equity research and portfolio management and eight years with Blackrock Japan (formerly Merrill Lynch Investment Managers).
The internal equities department, meanwhile, embarked on a recruitment drive in 2014 that saw significant appointments made on the India, China, GCC & MENA, Latin America, and risk and operations teams. There was also some departmental restructuring, which saw the Australia portfolio merged with the Asia ex-Japan department to create a new Asia-Pacific team, which the fund maintains will allow it to target a wider pool of potential investments.
The staffing and structural changes speak to a second development over recent years. Although there has been no significant change to ADIA’s stated geographic allocations, the past year or so has seen an emphasis on Asian markets, which reflects Abu Dhabi’s broader trade patterns in terms of exports (see overview).
To some degree this perception has been generated by high-profile transactions, such as ADIA’s decision in 2015 to spend $1.2bn, including debt, to acquire a stake in three Hong Kong hotels. Under the terms of the deal ADIA gained a 50% holding in Grand Hyatt Hong Kong, Renaissance Harbour View and Hyatt Regency Tsim Sha Tsui from Hong Kong-listed New World Development.
Other Asian advances by ADIA have come with less fanfare. In 2014 ADIA was granted permission by the Chinese market regulator to increase its allocation of Chinese “A” shares (equities in the renminbi currency that are purchased and traded on the Shanghai and Shenzhen stock exchanges). Foreigners are usually denied access to this asset class, and are instead confined to buying renminbi “B” shares. The Chinese government has been moving tentatively towards allowing greater access by foreigners to “A” shares for some time, a process which developed economies have been encouraging as demand for Chinese equity has grown. Under the new agreement ADIA’s access to Chinese “A” shares, which is permitted under a qualified foreign institutional investor scheme similar to that being implemented in Saudi Arabia, has been increased by $500m to $1.5bn.
Despite the turbulence that was seen in the Chinese economy over 2015, ADIA’s interest in Eastern markets is likely to be maintained. Although there are concerns regarding China’s growth prospects in 2016, pockets of optimism surround certain asset classes, such as the high yields of US dollar bonds issued by Chinese developers, which have been producing attractive yields of 8.3% per year.
The wide breadth of asset classes that ADIA invests in also gives it considerable room for manoeuvre as it pursues opportunities in the emerging markets of the East. In India, for example, some of the most interesting prospects lie in the real estate sector.
In recent years, according to ADIA’s annual report, the fund has remained focused on developing institutional quality assets in Asian markets, especially in segments that are being buoyed by the emergence of a middle class, such as for-sale housing and retail.
The developed markets of the East are also likely to present ADIA with more opportunities for growth, as it deploys and recycles capital in locations such as Japan, Australia and South Korea.
In the meantime, Western Europe and the US will continue to play a prominent role in ADIA’s consolidated portfolio. The fund has continued to fine-tune its approach to its traditional hunting grounds, recently reorganising its infrastructure team to place more emphasis on sector specialisations coupled with geographic responsibilities.
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