In its new annual report, Abu
Dhabi’s biggest sovereign wealth fund disclosed a
sharp increase in the percentage of assets it runs internally,
plus a new "high conviction" allocation.
Sovereign wealth funds move slowly. As large long-term
investors, they don’t often shift large parts of
their portfolios around – or change strategies on a
whim. But over the past four years a sea change has swept over
one of the more cautious sovereign wealth funds: the Abu Dhabi
Investment Authority (ADIA), which according to a Sovereign
Wealth Center (SWC) estimate now has some $620 billion under
Last week the fund released its sixth annual report as
evidence. ADIA started publishing such reports in 2010 as
public concerns over sovereign wealth fund opacity were at a
peak. True, the publications are often derided for not
providing basic information like assets under management,
annual returns or a precise asset allocation. But close reading
proves them enlightening nevertheless, describing in detail,
for example, how each investment department has reacted to
global market trends over the preceding year.
From 1997 until 2011, 80 percent of ADIA’s
assets were managed by external asset managers. In 2012, as the
fund added new management in several asset classes, this
percentage shifted slightly, with a five percent reduction in
the amount of the portfolio turned over to outside investment
teams. At the time, ADIA’s decision was broadly in
line with those of its peers, many of which started to
aggressively insource management to gain greater control of
strategy, reduce fees, and facilitate the transfer of
investment know-how following the financial crisis.
But in 2014, according to the annual report, ADIA took the
major step by allocating a further 10 percent of its assets to
internal teams, bringing the percent overseen by external
managers down to 65 percent from 75 percent. This might not
seem like a big deal, but even at SWC’s
conservative assets under management estimate, that means ADIA
has withdrawn some $62 billion worth of mandates from external
firms. That’s bound to generate a lot of very
unhappy portfolio managers.
The change also speaks to ADIA’s strategy of
reducing the number of managers it uses to enable it to build
stronger, more transparent and increasingly meaningful
relationships with a smaller number of firms and individuals.
The rise in internally managed assets is also likely a function
of ADIA’s expansion of its real estate and
infrastructure programs, which are largely run internally, and
its increased appetite for direct private equity investments,
which are also managed inhouse. ADIA has been building its
expertise in these types of investments since 2007. Last year,
notably, the state-owned investor increased its headcount in
its real estate department.
As it insources, ADIA seems to be shifting its strategy.
While 55 percent of its portfolio remains indexed, the
fund’s risk tolerance appears to be rising in its
actively managed allocation. In a somewhat contrarian stance,
ADIA has often chosen to use internal teams to oversee riskier
types of investments. By doing so it has greater visibility
into specific strategies and more control over individual
For example, in 2013, the fund chose to add allocations to
such developing markets as emerging Europe, Latin America and
South Africa via its internal equities department. In 2014,
this trend continued with a new and notable so-called
high–conviction stock allocation, in which internal managers
make sizeable bets on a small number of companies they strongly
believe will outperform the market, generating so-called alpha,
performance above the benchmark, as they do.
Accordingly, ADIA appears to be shedding its conservative
legacy and looking to leverage both its scale and long-term
time horizon to make generate higher returns. The strategy may
be working: Since 2008 the fund’s 30-year
annualized return has risen from to 8.4 percent from 7.6
percent, according to its annual reports. Its more-volatile,
20-year annualized return rose 7.4 percent in 2014 from 6.1
percent in 2008.
A paragraph in the managing director’s letter,
from Hamed bin Zayed Al Nahyan, speaks to a more radical shift.
In 2014, Al Nahyan explained, the fund made a number of
changes in its investment procedures.
"Most notably, this included the development of a new
operating model for our investment departments that will
increase the flexibility of managers to target
'alpha’ opportunities that may not easily be
captured within the structure of ADIA’s neutral
benchmark, or policy portfolio," he wrote. "These activities
will empower our skilled investment managers to seek
outperformance, within agreed limits."
For those who know ADIA, this is a major departure indeed.
Such a strategy seems influenced by the so-called strategic
tilting model that was pioneered among sovereign wealth funds
by the $21.5 billion New Zealand Superannuation Fund, with
which ADIA has been working on private equity deals through the
While ADIA might not have metamorphosed into a quick-moving
or risk-hungry investing dynamo, 2014 was a year of powerful
change for the fund, one that has seen it adopt new models that
may enable it to better leverage its strategic advantages
— scale and long-term investment horizons. By doing
so, it hopes to to capture the benefits of secular trends and
find alpha by exploiting market dislocations.