Adia is estimated to have assets under management of between $600 billion and $800 billion and, up until three years ago, external managers ran 80% of that.
Its 2014 report, released in June, shows that figure has fallen to 65%, from 75% the year before. If the $800 billion figure is correct, then that’s $120 billion of money that has been taken from external fund managers and moved in-house over the last three years.
This should not be a surprise. In April, Euromoney’s feature on emerging-market real estate gained access to Adia’s in-house real estate and infrastructure team, revealing a level of great sophistication in the fund’s internal capabilities. It is natural that it should want to use this expertise to manage as much of the fund’s assets as possible.
External managers run much of this passive allocation, which is unusual among sovereign wealth funds. These funds normally choose to do the easier, vanilla things themselves; but Adia reasons that the fees they can pay on passive mandates are so low that it’s less hassle, and more efficient, to outsource management than do it themselves.
But where most sovereign funds do mainstream management internally and use external firms for high-alpha things at the margins – for example, Norway’s Norges Bank Investment Management, which uses external equity managers to reach emerging or frontier markets where it doesn’t have in-house expertise – Adia seems to be moving in the opposite direction.
This year’s review explicitly addresses the trend in the open letter from managing director Hamed bin Zayed Al Nahyan, who writes 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,” and says the strategy will “empower our skilled investment managers to seek outperformance, within agreed limits.”
This seems to be referring to the fund’s in-house managers.
A look at hires and departmental reorganizations in 2014 supports the view. Two new mandates were created within the Internal Equities Department during the year – US equities and high conviction – and the infrastructure team implemented a new structure. Of the three biggest hires Adia has made in the last 18 months, two have been for internal management.
|Emerging-market infrastructure is perceived as |
a low-risk entry into emerging markets
Nick Tolchard, Invesco
The fund appointed its first global head of research, Christof Ruhl, former group chief economist of BP, in 2014; and more recently in May, John Pandtle from Eagle Asset Management was made head of the US in the internal equities department. (The big hire on the external side was global head of external equities Brian Tipple, who joined from Key Private Bank of the US in September.)
One of the fund’s known areas of focus is emerging-market infrastructure, and this fits with the findings of a new survey from Invesco of more than 50 individual sovereign investors representing $7.09 trillion of assets, much of it from the Middle East.
The study found total sovereign portfolios to be overweight emerging-market infrastructure (17%) relative to emerging markets generally (9%). At Adia, the fund can invest up to 5% (and a minimum of 1%) in infrastructure, and up to 25% in emerging markets, considerably above index weights.
The fund said, in its most recent report, that it “plans to recruit selectively during 2015” in its alternative investments department, and expects “further selective recruitment” in its real-estate and infrastructure team.
“Emerging-market infrastructure is perceived as a low-risk entry into emerging markets,” says Nick Tolchard, chair of Invesco’s global sovereign group and head of Invesco Middle East. Sovereign funds want exposure to emerging markets, but are also put off by fears of political instability, corruption, regulation and a lack of legal protection.
“Infrastructure is perceived as reducing all of these risks to some extent, because in general they are mitigated by government support.”
Adia said of its real estate and infrastructure performance in 2014: “Adia remained focused on developing institutional quality assets in Asia’s emerging markets,” although in fact the infrastructure team’s most notable public acquisition during the year was probably in Queensland, acquiring a minority stake in Queensland Motorways.
Invesco’s survey finds that the biggest challenge by far for sovereign investors is sourcing deals, cited by 53% of their respondents as the number-one factor. It also finds that the problem is most acute in infrastructure. Increasingly, it expects sovereign funds to work together to gain access to the asset class.