• Home
• UAE
• News Article

United Arab Emirates: ADIA risk-taking may grow

Subject: The outlook for the Abu Dhabi Investment Authority .

Significance: The world's largest sovereign wealth fund's first ever disclosure in March revealed a conservative investment strategy that has ensured stability but modest growth. The appointment of Sheikh Hamed bin Zayed al-Nahyan as chairman last month -- to replace his brother Sheikh Ahmad bin Zayed al-Nahyan, who died in a glider crash in Morocco -- has raised questions about how the fund will proceed in the future.

Analysis: Before his death, Sheikh Ahmed bin Zayed al-Nahyan was at the forefront of transparency initiatives at the fund. In March, the Abu Dhabi Investment Authority ( ADIA ) made its most extensive disclosure of its holdings to date, releasing its first synopsis of its investment strategies to meet disclosure rules under the Santiago Principles.

ADIA is under no legal obligation to disclose its performance publicly, and does not need to raise funds on international capital markets (a need that has prompted some other local organisations to improve transparency). Its voluntary commitment to the Santiago Principles signed by the Sheikh Ahmed in 2008 was probably prompted, much like some other large sovereign wealth funds, by a desire to demonstrate that its investments are driven by a profit motive rather than a political agenda.

Transparency limits. The results of this initiative in some ways added clarity to the management of the fund, but left many questions about performance unanswered, since certain information was not disclosed.

For example, the fund reported its annualised average growth rates over 20- and 30-year horizons leading up to 2009. However, it did not report its growth rate during the 2008-09 period, nor the changing performance during the 20- and 30-year periods.

In one way, the limited information reported suggests that the fund is looking to build for the long term rather than resort to reporting short-term growth. The lack of reporting could also mask losses from fallout in the financial markets during the credit crisis. In any case, full performance disclosure is not required explicitly by the Santiago principles, and ADIA has apparently attempted a careful balance between disclosure and proprietary information protection. It has not revealed the size of its assets. In December, RGE Monitor estimated the assets of ADIA and Abu Dhabi Investment Council to be worth 425 billion dollars. The financial crisis in 2008 has been estimated to have taken approximately 120 billion dollars off the value of ADIA fund.

Track record. ADIA showed solid returns in its first public disclosure, posting average annualised returns of 6.5% during the past 20 years and 8.1% during the 30 years until end-2009. In other words, the fund has earned 10.1 dollars for every dollar invested in 1979, and 3.5 dollars for every dollar invested in 1989.

However, should the fund have deposited all its assets in index-linked assets (Exchange Traded Funds) tracking the Dow Jones Industrial average, it would have earned more during the same time periods -- 12.4 dollars for investing in 1979 and 3.8 dollars in 1989. When amplified by an initial capital input of more than 100 billion dollars, the difference is substantial.

Conservative strategy. The seemingly modest returns can in large part be attributed to ADIA 's investment strategy as revealed by the disclosure.

More than 60% of the assets are linked to a conservative indexation strategy, while 80% of all assets are managed externally. Internally, its expertise lies largely in choosing the external managers best equipped for its goals.

The fund allocates 35-45% of its assets to developed market stocks, 10-20% to emerging market stocks, and 10-20% in government bonds. Investment is limited to up to 10% in riskier areas such as property and hedge funds, and the fund also keeps up to 10% of its assets in cash.

Countering speculation that ADIA would focus more within the region after the crisis, the disclosure suggested that most of investments are outside the Gulf Cooperation Council. ADIA invests 35-50% of assets in the United States, and 25-35% in Europe, with the rest spread between Asia and other emerging markets. Since the rebound in the markets the fund has begun cautiously to increase its exposure to higher-growth markets.

Challenges. Sheikh Hamed bin Zayed, Sheikh Ahmed's successor, is likely to continue in his predecessor's footsteps with key policies:
Labour. Sheikh Ahmad worked to manage and foster the interest of Emirati nationals that wish to work in the financial sector. Recruiting and retaining local employees is a key challenge, given the limited pool of talented Emirati nationals and competition with ministries for talented graduate staff. ADIA 's long-standing scholarship system funds the education of talented local Emiratis. About 90% of the beneficiaries of this programme are citizens of Abu Dhabi yet more than 70% of ADIA 's portfolio managers are from outside the emirate.

Corporate relations. Sheikh Hamad will also have to manage corporate relations established during Sheikh Ahmad's tenure. The latter made several large investments including in residential property in the United States and United Kingdom. This included a 7.5 billion dollar acquisition of 4.9% of Citigroup in 2007. At the time of the deal, shares were valued at more than 32 dollars per share. They currently trade at below 5 dollars. In an arbitration claim, Citigroup claims that ADIA has accused the bank of "fraudulent misrepresentations" in negotiations leading to the deal. ADIA has not commented on the arbitration.

Change. The appointment of a new chairman also raises certain questions about the fund's outlook:
Transparency. It is not yet clear how much more propriety information will be disclosed going forward. ADIA is not beholden to the Santiago Principles, so disclosure is purely voluntary. However, this may be to some extent be a means of gaining support for buying or selling assets that carry political dimensions in their respective host countries. As the global financial crisis eases, buyouts and acquisitions are less likely to be weighed down by political considerations, and the momentum for further disclosure is likely to wane. Sheikh Hamad will likely continue existing transparency measures, but protecting propriety will probably take precedence over more disclosure. ADIA has typically kept equity investments below 4.9% of shares on most markets so that it would not have to disclose its holdings publicly.

Investment. Sheikh Hamad could opt for a more aggressive ownership strategy, given that the fund has underperformed against the Dow Jones industrial average. Balancing risk-taking with conservatism is crucial to preserving the wealth of the emirate. During Sheikh Hamad's first few years in office, he is likely to continue Sheikh Ahmed's conservative strategy, before making more fundamental changes to asset management as the global economy gathers pace.

Conclusion: Sheikh Hamad has assumed a position of authority over an institution with more than three decades of conservative investment pedigree. In the short term, ADIA 's strategy is likely to see relative continuity. However, in the longer-run, investment strategies are likely to see a partial shift as the fund looks east for higher growth, even if this involves some greater risk.

© Oxford Analytica 2010