Abu Dhabi Wealth Fund Cuts Reliance on External Managers

Photographer: Charles Crowell/Bloomberg

The exterior of the Abu Dhabi Investment Authority building is viewed in Abu Dhabi. ADIA has generated annualized returns of 7.6 percent over the past two decades and 8.2 percent for the past 30 years, according to the report. Close

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Photographer: Charles Crowell/Bloomberg

The exterior of the Abu Dhabi Investment Authority building is viewed in Abu Dhabi. ADIA has generated annualized returns of 7.6 percent over the past two decades and 8.2 percent for the past 30 years, according to the report.

Abu Dhabi Investment Authority, among the world’s biggest sovereign wealth funds, is curbing reliance on outside fund managers and reducing holdings in developed-world shares in favor of emerging market investments.

The fund counts on external investors to manage about 75 percent of assets, down from 80 percent in 2011, it said in its annual report for last year released today. ADIA, as the fund is known, also reported that 55 percent of its assets are invested in so-called index-replicating strategies, down from 60 percent, as it boosts investments in alternative assets.

Abu Dhabi, capital of the United Arab Emirates and home to about 6 percent of the world’s proven oil reserves, is seeking to diversify from crude exports with investments abroad. The wealth fund, which doesn’t disclose the value of its assets, is building up in-house teams in areas such as real estate and private equity as it seeks greater control over investments.

The 37-year-old fund, with about 1,400 employees and led by Managing Director Sheikh Hamed bin Zayed Al Nahyan, also cut its target range for developed world equities in its portfolio to 32 percent to 42 percent, down from 35 percent to 45 percent a year earlier. It expects to invest 10 percent to 20 percent of assets in emerging market equities, unchanged from 2011.

Photographer: Duncan Chard/Bloomberg

Skyscrapers stand on the skyline viewed from the Central Market in Abu Dhabi. Close

Skyscrapers stand on the skyline viewed from the Central Market in Abu Dhabi.

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Photographer: Duncan Chard/Bloomberg

Skyscrapers stand on the skyline viewed from the Central Market in Abu Dhabi.

Emerging Markets

“Economic leadership is passing to emerging markets, not just as their weight in the global economy passes 50 percent, but as their share of likely future global growth moves far higher,” Sheikh Hamed wrote in the report. “As a bloc they continue to offer exciting and attractive opportunities to deploy capital.”

ADIA has generated annualized returns of 7.6 percent over the past two decades and 8.2 percent for the past 30 years, according to the report. In addition to developed and emerging market equities, the fund also invests in small cap equities, fixed income, infrastructure, hedge funds and private equity.

Earlier this month, it hired former Deutsche Bank AG executive John McCarthy as global head of infrastructure. In January, it appointed Gregory Eckersley head of its internal equities department, overseeing portfolios, risk management and the due diligence process. Colm Lanigan, a former Credit Suisse First Boston banker, was named head of Principal Investments in its private equity unit in October and Marc Keirstead as chief financial officer of private equities department.

‘Busy Year’

“It was a busy year on the recruitment front with key appointments made in a number of departments,” Sheikh Hamed wrote.

ADIA also boosted its allocation to Chinese equities last year after receiving approval from the market regulator under the so-called Qualified Foreign Institutional Investor scheme. The fund boosted its holding to $500 million in the third quarter, up from an earlier limit of $200 million, it said.

It also highlighted the “rapid expansion in the international use of the Chinese Yuan in global trade and financial markets.” The yuan’s progress towards becoming an international currency “is more rapid than had been expected and should offer more opportunities to global investors in coming years,” ADIA said.

The fund’s fixed income and treasury department also began investing in non-investment grade debt securities in the second half of last year amid declining yields in major government bonds. A 30-year bull market in sovereign bonds has likely ended and investors will need to manage their portfolios with the expectation of lower fixed income returns, ADIA said.

40 Nationalities

ADIA, which has employees from about 40 nationalities, seeks to invest between 35 percent and 50 percent of its assets in the U.S., with a further 15 percent to 25 percent targeted for emerging markets. The fund expects to have 20 percent to 35 percent of its portfolio in Europe, with the remainder invested in so-called developed Asian markets.

The fund, which doesn’t invest in the United Arab Emirates, counts on Emirati nationals for about a third of its workforce. It is funded from the budget surplus of Abu Dhabi and government withdrawals have been infrequent, coinciding with extreme or prolonged commodity price weakness, it said.

West Texas Intermediate crude fell for a fifth day, the longest run of declines this year, as China signaled it may accept a slower economic growth rate. WTI for July delivery fell as much as 92 cents to $93.23 a barrel in electronic trading on the New York Mercantile Exchange and was at $93.66 at 10:08 a.m. London time.

To contact the reporter on this story: Dale Crofts in Dubai at dcrofts@bloomberg.net

To contact the editor responsible for this story: Dale Crofts at dcrofts@bloomberg.net

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