Middle East: Special focus

Middle East: Special focus

Exploring the challenges and opportunities

Swimming not drowning

Swimming not drowning

Bond market has ability to adapt

April 2006

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Money and mystery: Adia unveils its secrets

Abu Dhabi Investment Authority is one of the world’s biggest institutional investors. It is also one of the most guarded. It publishes no numbers. It seldom makes any public statements. In a rare interview, two of its most senior officials lift the lid on the organization, revealing the reasons for its success. Sudip Roy reports from Abu Dhabi.


More on the Abu Dhabi Investment Authority

IT’S ONE OF the most powerful financial institutions in the world but little is known about it. The Abu Dhabi Investment Authority has an influence in the markets that few investors can match. It has unrivalled access to the best strategists and advisers. Banks and fund managers fall over themselves to win its business. It can hire the brightest talent at home and abroad purely on the strength of its name. Two things make Adia special. It manages the emirate’s excess oil reserves, estimated to be as much as $500 billion. Its portfolio grows at an annual rate of about 10% compounded. As such Adia is the world’s second biggest institutional investor, behind only the Bank of Japan, according to the Oxford Business Group. Its pulling power is immense. According to a former HSBC banker, it’s one of the few organizations Stephen Green, or his predecessor as chairman of HSBC, John Bond, will drop everything to go and see. They won’t be the only senior bankers and corporate executives prepared to do this.

But what makes Adia so interesting is the veil of secrecy that shrouds its activities. In the 30 years since it was established, it has never publicly declared the amount of assets it has under management. Its website lists just its contact details; nothing more.

 

Money and mystery make a potent mix. It has helped Adia create a unique aura. Any hint of what it’s about to do can move markets. "That’s the power of the Adia name," says Saeed Mubarak Al Hajeri, executive director of the organization’s emerging markets department.

There is little that catches the eye about the four grey-brown buildings on 125 Corniche Street, where Adia has its headquarters. Inside, too, the décor is plain. There is no grand reception area or waiting room. The offices are simple but spacious enough for the 1,300 people who work there. It’s standard fare for a government organization. Certainly there is nothing to suggest that this is home to one of the world’s wealthiest investors (although the organization is expected to move to a more fitting waterfront skyscraper later this year).

Adia was established in 1976 by Sheikh Zayed bin Sultan Al Nahyan, the founder of the United Arab Emirates. The goal was to invest the Abu Dhabi government’s surpluses across various asset classes, with low risk. It was a bold move. At the time it was novel for a government to invest its reserves in anything other than gold or short-term credit. Even today, investment in short-term paper remains the strategy for the vast majority of countries, although Kuwait, Singapore and Norway have followed Abu Dhabi’s lead.

Conservative ethos

Over the years, though Adia has become more sophisticated as an investor, its central tenet has not changed. "We are not speculators," says Al Hajeri. "We don’t like to change companies or try to take out the management. We are long-term conservative investors."

Diversification is the key to Adia’s investment ethos. It invests in all international markets – equities, fixed income, real estate, private equity and alternatives (hedge funds and commodity trading advisers – CTAs). This multi-asset approach helps to reduce risk.

Adia has one global portfolio, which is then broken down into sub-funds covering a specific asset class. In equities, for example, the specific asset classes include European equities, US equities, Japanese equities, Australian equities, regional small caps and emerging markets equities. In fixed income, the specific asset classes include global government bonds, global investment-grade credit, emerging markets and global inflation-indexed bonds. Cash is another separate asset class.

This segregation of specific asset classes allows for a more specialist approach to investing. Jean-Paul Villain, head of investment strategy, provides the example of inflation-indexed bonds. "We did not want the guys in charge of nominal government bonds to have the flexibility of investing x% in inflation-indexed bonds," he says. "It’s a proper asset class. It has [its own] drivers."

Each asset class has its own fund managers and in-house analysts covering it. Each has its own benchmark and guidelines. Each is managed through a range of investment strategies and techniques. In emerging market equities, for example, investments are made on a regional basis but also on a country one for China and India.

In addition, some products employ both active and passive investment styles, although the extent to which one style is favoured over the other depends on the specific asset class. Guidelines are tighter for government and inflation-linked bonds, for example, than for emerging markets debt and investment-grade credit.

External managers

What further defines Adia is its use of third-party fund managers to complement its in-house portfolio investors. Almost every asset class is managed both internally and externally. Overall between 70% and 80% of the organization’s assets are managed outside. The aim, says Al Hajeri, is to bring that down to between 60% and 70% without upsetting Adia’s low-risk profile.

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When BES collapsed earlier this year, markets briefly feared a return of the crisis to Portugal and to Europe. Even after the bank's bailout, investigators still pore over bank documents, transfers and deals, trying to make sense of Salgado’s last days battling to keep his empire afloat. The backstory is of an extraordinary decades-long rivalry between the country's two pre-eminent business families.