The Abu Dhabi Investment Authority (ADIA), the emirate’s sovereign wealth fund (SWF) and one of the principal pillars of Abu Dhabi’s economic stability, has come a long way since its foundation in 1976.
Having started out in a shared office, where a small staff and a handful of external managers pursued a simple investment strategy based on stock and bond purchases, in 2017 ADIA is the world’s third-largest SWF, according to the Sovereign Wealth Fund Institute, with estimated assets of some $792bn. The availability of such a substantial reserve largely explains the confidence that is shown by both domestic and foreign authorities in Abu Dhabi’s ability to accommodate a period of fiscal deficits caused by depressed oil prices.
According to the IMF, the UAE has sufficient external reserves to sustain it for more than 20 years, with ADIA accountable for the bulk of them.
In 2016 ADIA passed a milestone when it reached 40 years of age. The occasion provided a suitable opportunity for an evaluation of its importance to the local economy, the highlight of which is an annualised rate of return of 7.5% over 30 years, as of December 2015, compared to the average US consumer price index rate of 2.7% over the same period. ADIA’s importance to the emirate, however, extends well beyond the simple financial benefit secured from what is effectively a decades-long national investment effort.
In an open letter published to mark the occasion, Sheikh Hamed bin Zayed Al Nahyan, managing director of ADIA since 2010, highlighted some of the less tangible gains brought by its activity. One of the most important of these, according to Sheikh Hamed, is ADIA’s function as a breeding ground of talent, which has resulted in numerous UAE national alumni going on to perform key roles in Abu Dhabi and elsewhere across the nation. These include ministers and chairmen of government departments, who have benefitted from a useful combination of hands-on experience in global investment and ADIA’s extensive training and development programmes.
From an investor’s perspective, however, the “where and what” of ADIA’s activities is the most interesting story.
The Authority has broadened its portfolio from three asset classes in 1976 to 12 today. Its current strategy is underpinned by investment in developed market equities, for which it has set a 32% minimum and a 42% maximum, followed by emerging market equities (10% and 20%, respectively) and government bonds (10% and 20%).
ADIA has also established smaller holdings in various areas, such as real estate (5% and 10%), credit (5% and 10%), hedge funds and managed futures (5% and 10%), infrastructure (1% and 5%) and small cap equities (1% and 5%). In terms of geography, the Authority’s investment policy is weighted towards North America (which it targets at between 35% and 50% of its portfolio), followed by Europe (between 20% and 35%), developed Asia (10% and 20%) and emerging markets (15% and 25%).
An Interested Audience
While this strategy has remained unchanged in terms of defined limits over recent years, the ever-sensitive investment community has kept a sharp eye out for changes of emphasis within it. In the case of a wealth fund the size of ADIA, its strategic decisions are of global interest, and for this reason, the recent closing of one ADIA office and the opening of another has generated considerable attention.
In late 2015 it was revealed that ADIA intended to close down its London office, which had been the Authority’s only international base since the mid1980s. In the intervening decades ADIA has built up a sizeable UK portfolio, which includes stakes in the parent companies of both Gatwick Airport and Thames Water, and the more recent acquisition of an interest in Angel Trains, which is one of the UK’s largest rolling stock owners.
Speculation as to what spurred the decision ranged from it being a reaction to the declining oil prices to the UAE’s political concerns, and when ADIA subsequently announced that it would establish a presence in Hong Kong the message to some was clear: the nation’s principal SWF was redirecting its investment policy away from the slow-growth West and towards a newly dynamic East.
ADIA has downplayed the significance of its changing footprint, however, stating to the UK press at the time that the closure of the London office “has no impact on our investments in, and commitment to, the UK, which will continue as before.”
Industry observers have also pointed out that technological advances have enabled ADIA to close its UK office, which housed around 20 employees, without a loss of functionality. It is also true that the Authority’s interest in eastern opportunities is not new. ADIA has been investing and building relationships in Asia for more than three decades, with a portfolio that spans multiple asset classes.
Nevertheless, ADIA’s Asian interests have grown significantly in recent years. In 2014, for example, it received permission from the Chinese market regulator to increase its allocation of Chinese A shares – equities in renminbi which are purchased and traded on the Shanghai and Shenzhen stock exchanges.
Foreigners are usually denied access to this asset class and confined to purchasing 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 allocation to Chinese A shares, which is permitted under a Qualified Foreign Institutional Investor scheme which is similar to that being implemented in Saudi Arabia, was increased by $500m to $1.5bn.
A year later ADIA made another sizeable Asian investment, deciding in 2015 to spend $1.2bn, including debt, to acquire a stake in three Hong Kong hotels owned by Chinese billionaire Cheng Yu-tung. Under the terms of the deal, ADIA gained a 50% holding in the Grand Hyatt Hong Kong, the Renaissance Harbour View and the Hyatt Regency, Tsim Sha Tsui from Cheng’s Hong Kong-listed New World Development, in a move which garnered headlines across the global business press.
ADIA’s Hong Kong office opened in October 2016, and is its first on-the-ground presence in the territory. ADIA Hong Kong will act as a platform for the Authority to pursue its interests in China and other important Asian markets, and the local team will, according to ADIA, engage in a broad range of investment-related research and ongoing analysis of Asia-Pacific market and economic trends.
In establishing an eastern platform ADIA is responding to a changing world economy which has seen the contribution of Europe and the US to global GDP decline in relation to that of China, which accounted for only 4.1% of the global economy in 1970 but in 2015 was responsible for 15.6%, according to Forbes. This trend is likely to continue, with projections for 2025 seeing China claim 17.2% of world economic output.
India has also emerged as a more powerful economic player, and is expected to contribute 8.7% to global GDP in 2025, up from 6.7% in 2015. ADIA has already shown an interest in India’s green energy market, investing $200m in ReNew Power, the first Indian company to hit installed renewable energy capacity of 1 GW. In June 2016 Greenko Energy Holdings, one of India’s leading renewable energy firms, announced that ADIA will invest $150m in the company, which will contribute to its business growth through the development of new renewable energy projects.
In its most recent annual review, ADIA acknowledges some of the challenges ahead in terms of securing returns on its investments. These include the fact that most assets appear to be fair-valued, and therefore future returns are likely to run below historical averages.
ADIA is preparing itself for slower growth in developed economies over the medium term, while adopting a nuanced approach to exploit the potentially better outcomes in some segments of emerging markets. Despite its forecast of muted growth, however, ADIA points out that its 40 years of experience has shown that productivity can slow or accelerate without warning, and that therefore “it is important not to be unduly pessimistic about the future.”
This tendency of markets to spring surprises from time to time is one of the many reasons why the substantial expertise that resides within one of Abu Dhabi’s most venerable entities is so essential.
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