Adia says Abu Dhabi fund well-positioned to capitalise on post-pandemic economic rebound

Abu Dhabi's sovereign wealth fund is focusing on opportunities that are set to benefit from the move to lower carbon economy

Adia headquarters in Abu Dhabi. The sovereign fund has managed pandemic-induced volatility in 2020 with agile investments. Stephen Lock / The National

Abu Dhabi Investment Authority (Adia), one of the world's biggest sovereign wealth funds, is well-placed to capitalise on future investment opportunities after successfully navigating pandemic-driven headwinds.

The fund is also focused on the potential impact of climate change on its portfolio and is assessing risk factors for all new investments. It is focusing on investment opportunities set to benefit from the move to a lower carbon economy, Adia said on Wednesday, in its 2020 annual report.

“There is no doubt that 2020 will be remembered as a year of widespread, seismic change,” Sheikh Hamed bin Zayed, Adia's managing director, said. “Through careful planning, robust processes and the commitment and skill of its people, Adia has successfully navigated this year of turmoil while continuing to position our institution for the future.”

The fund's long-term returns improved last year compared to 2019, it said.

Adia, which does not disclose its assets, invests on behalf of the Abu Dhabi government. It is the world's fourth-biggest sovereign fund after Norway, China and Kuwait, according to the Sovereign Wealth Fund Institute. Adia makes direct and indirect investments across asset classes including equities, fixed income, infrastructure, private equity and real estate.

While the fund built resilience and managed downside risks to its portfolio during the pandemic-driven volatility, it was also ready for potential opportunities as economies rebounded from the global economic slowdown.

“This trade-off is at the centre of Adia’s investment strategy and we were able to efficiently navigate market turmoil to position ourselves for the rebound sparked by the massive policy intervention from fiscal and monetary authorities across the globe,” Sheikh Hamed said.

“Throughout the crisis, Adia remained focused on its mission of prudently managing capital on behalf of the government of Abu Dhabi.”

The pandemic last year tipped the global economy into its worst recession since the 1930s. Governments and central banks around the world subsequently stepped in with $25 trillion worth of monetary and fiscal measures to support economies, stabilise markets and strengthen financial institutions, according to the International Monetary Fund.

The world economy, which shrank 3 per cent in 2020, is expected to expand 6 per cent this year, the IMF said.

Adia's 30-year annualised rate of return at the end of 2020 reached 7.2 per cent on a point-to-point basis, compared with 6.6 per cent in 2019, according to the report. Its 20-year annualised rate of return climbed to 6 per cent, from 4.8 per cent in 2019.

“These increases can be attributed to both the years falling out of the calculations as well as performance in 2020, underlining our preference for focusing on long-term trends,” Adia said.

Adia, which is part of the One Planet Sovereign Wealth Fund Working Group, increased its exposure to renewable energy in 2020. Through its infrastructure division, Adia now has an indirect interest in assets with a renewable energy capacity of more than 20 gigawatts.

The fund’s real estate division also developed new tools to assess and manage climate-change risk within its portfolio during the past year, while its indexed funds department introduced a new portfolio that “systematically integrates the opportunities and risks associated with climate change”, according to the report.

Adia introduced changes in investment bands of certain asset classes to reflect its long-term portfolio strategy. The fund increased the allocation bands for private equity investment to between 5 per cent and 10 per cent, up from 2 per cent and 8 per cent previously. The investment band for infrastructure has climbed to the 2 per cent and 7 per cent range, from 1 per cent and 5 per cent range.

In geographical terms, the band for developed Asia was reduced to between 5 per cent and 15 per cent from between 10 per cent and 20 per cent, which is “consistent with changes to the region’s relative weighting in global indices”, Adia said.

The sovereign fund also reorganised its “active equity teams” last year and combined external and internal equities operations into a single equities department.

“The structure allows the department to select how best to access the markets it believes offer the greatest potential for alpha generation through active management, either through internal teams or external managers,” Adia said.

The fund is focused on harnessing the latest developments in machine learning and big data to expand its investment horizons. Adia has created a team within its strategy and planning department that will develop and implement investment strategies using a quantitative and scientific approach. The build out of the team began in 2020 and recruitment will continue.

“Adia plans to invest selectively in growing its capabilities in line with the changing nature of global markets, recognising that capturing future sources of excess return will likely require new and expanded skillsets to complement traditional investing talent,” it said.

Looking ahead, Adia expects the Covid-19 pandemic and policymakers’ responses to continue shaping the global economic landscape for years to come. The pandemic forced governments around the world to run deep fiscal deficits and accumulated sizeable public-debt burdens.

“Although inflation rates remain subdued, fiscal stimulus, strong monetary growth and demographic trends could prompt a comeback,” Sheikh Hamed said.

Government bonds, which have been a central plank of portfolio construction over the past three decades, will continue to play a role. However, “with government bond yields at or very near to their all-time lows, investors will continue to look for ways to expand their investable universe”, he said.

It will take time to fully assess which of the many changes to the way people lived and worked in 2020 will represent permanent shifts, but the immediate impact of the pandemic was “both broad and unevenly distributed, and its effects will be felt for years to come”, Sheikh Hamed added.

Adia employed 1,680 people in 2020 and its portfolio was 55 per cent actively managed against 45 per cent passive management of investments. It was equally divided between internal and external management of investments in 2020.