ADIA to Rejigger External Equities Teams

(August 22, 2011) — Abu Dhabi’s sovereign wealth fund is seeking to restructure its equities teams.

According to Bloomberg, the Abu Dhabi Investment Authority (ADIA), one of the world’s three largest sovereign wealth funds with assets valued at around $328 billion at the end of 2008, is reorganizing its external equities teams into two sections. One section will focus on indexed funds while the other will focus on those that are actively managed. Currently, ADIA allocates 60% of its total portfolio to externally managed indexed funds. Overall, approximately 80% of the fund’s assets are invested by external fund managers.

While Sheikh Mohammed bin Khalifa Al Nahyan, son of the United Arab Emirates’ president, will lead the indexed funds department, Obeid Al-Suwaidi, previously director of external funds Far East, will lead actively managed external funds, according to Bloomberg.

“The creation of our new indexed-funds and active departments will streamline how we manage our relationships in the equities space with external fund managers. But it also forms part of our broader efforts to continually enhance the way we share and pool our knowledge and resources across the organisation,” an ADIA spokesman told Reuters.

Other sovereign wealth funds worldwide have been driven to make major changes to their teams and investments. A June study by Massachusetts-based Monitor Group shows that the financial crisis has spurred sovereign wealth funds to rely more on in-house assets and less on third-party expertise, for example.

In the Monitor Group report titled “Braving the New World: Sovereign Wealth Fund Investment in the Uncertain Times of 2010,” the advisory and consulting firm found that 2010 marked the beginning of a new pattern of sovereign wealth fund investment. According to Monitor, funds are making more direct investments in smaller sizes than witnessed previously. The firm stated: “During 2010, 21 of the 30 funds in the Monitor-FEEM Transaction Database executed 172 publicly reported investments, valued at a total of $52.7 billion. This represents an increase of more than 50% in deal volume from 2009 but a 23% decrease in investment value, continuing the trend of SWFs making a greater number of smaller investments. It is also the largest number of funds Monitor has witnessed making direct investments in any given year, up from 18 in 2009.”

“It is likely that we will continue to see SWFs taking a larger number of smaller stakes,” said Victoria Barbary, senior analyst at Monitor Group and co-editor of the report. “Contextualizing our data in the current economic environment suggests that commodities and other alternative assets will become an increasingly important asset class for SWFs. With SWFs keen to make good returns for their sovereign government owners, it may well be that they choose to increase their allocation to alternatives as they look to realign their portfolios with new economic results.”

In addition to the Monitor report, a February report by State Street Global Advisors (SSgA) similarly showed that the financial crisis spurred some funds to make several significant changes, such as relying more heavily on passive investment management strategies compared to active ones and increasing their focus on the emerging-market debt as yields on traditional asset classes have fallen. According to the study, one Middle East sovereign wealth fund commented on the significant shift during the past year of assets within sovereign portfolios from active to passive strategies, saying: “In the past we used to assume that assets should be managed actively unless a certain asset class or market clearly did not offer opportunities for active managers or reward active management. Now we tend to see this investment decision the other way round. We conclude that assets should by default be managed passively unless evidence is clear that a given asset class has sufficient imperfections that active management is likely to be consistently rewarded.”