A relatively bullish Abu Dhabi Investment Authority is set to ramp up its exposure to Asia, most notably via private market co-investments, the sovereign wealth fund’s latest annual review reveals.

Adia is also planning a range of new initiatives across the asset class spectrum such as turning fully active with its fixed income portfolio, drilling deeper into specific equity markets, and imparting greater importance to climate change and data analysis across its investment strategies.

“Demographic trends continue to favour emerging over developed economies, with India and China in particular expected to remain important engines of growth,” Hamed bin Zayed Al Nahyan, managing director of Adia, said in the review released yesteday (July 15).

“We will continue to seek opportunities to invest in these higher-growth markets, most typically alongside local partners in sectors that are closely aligned with the growth priorities of their respective governments."

Across most of the public and private market asset classes, Adia cited Asia as a key focus in light of its favourable long-term prospects.

Hamed bin Zayed Al Nahyan

This is despite concerns Al Nahyan flagged over the US-China trade war, citing last year's “broad and regrettable deterioration in trade relations”.

Still, Adia’s outlook for both Asian and global markets is rosier than the grim picture painted by other sovereign investors in recent months, such as the Monetary Authority of Singapore and Temasek, one London-based expert on sovereign wealth funds told AsianInvestor on condition of anonymity. 

“While ‘late-cycle’ has become a common term in market outlooks for 2019,” Al Nahyan added, “we believe that the diversity and adaptability of economies means that the current cycle may well surprise with its resilience.”

MORE ACTIVE, MORE GRANULAR

Having seen its 20-year annualised rate of return slip to 5.4% in 2018 from 6.5% the year before as market conditions have grown tougher, the Abu Dhabi wealth fund outlined its plans for a more active and targeted approach to some investments.

For one, Adia's fixed income and treasury department is scaling up its active investing, with a view to going fully active in the coming years, up from 40% now. As part of that move, the department plans to add a number of new positions, mostly in investment and research-focused roles.

This suggests the fund aims to build its exposure to private debt, including in Asia, in line with the trend among other large institutional investors, the sovereign fund expert said. Indeed, earlier this year it made its first allocation to Indian private debt through a $500 million special situations fund to be run by local firm Kotak Investment Advisors.

Adia has also expanded its team so it can do more co- and direct investments, much like many of its state institution peers. It manages about 45% of its assets in-house now, up from 25% in 2013.

In addition, Adia looks set to take a more focused approach to equities. Its internal equities department will this year explore the possibility of creating sub-mandates within some regional and country portfolios “to capture specific opportunities”, while the external equities department will consider creating additional single-country portfolios, the annual report said.

In doing so, it appears that the fund will ape similar moves by the likes of Norway’s Norges Bank and China Investment Corporation, which have already handed out emerging-market single-country equity mandates, the SWF expert said.

The Norwegian oil fund, for example, has invested in stand-alone stock portfolios in markets such as Malaysia, the Philippines, Thailand and Vietnam.

CLIMATE CHANGE, DATA

Like other large, sophisticated investors, Adia is also looking at the potential impact of climate change on its investments and ramping up its focus on data analysis.

It took the decision last year to formally integrate climate change considerations into its investment proposal review process. It also worked alongside five other major sovereign wealth funds to develop and publish the One Planet SWF Framework, which seeks to promote the integration of climate change analysis in the management of long-term portfolios.

On the data side, Adia conducted a risk-return project in 2018 involving all of its investment departments to identify opportunities and constraints across the total portfolio. In what will be an annual exercise, Al Nahyan said, these findings were then analysed by the investment committee, enabling it to fine-tune its investment and process-related priorities. 

Such moves are increasingly being undertaken by asset owners as it becomes ever more important to squeeze as much performance as possible out of investment portfolios. The pension fund for the UK's legacy coal industry recently conducted a similarly comprehensive exercise.

In addition, Adia said it completed a two-year research exercise in 2018 involving at least 20 of its global peers, to build a picture of how large organisations manage information and apply it to their decision-making process. These findings will help to inform how the fund evolves and how it analyses and uses information, it said in the report.