ADIA continues to trim external managers

In its annual review, the $773bn Abu Dhabi sovereign wealth fund reported a fall in 20- and 30-year annualised returns against a 'backdrop of slowing global growth'.

The Abu Dhabi Investment Authority (ADIA), a sovereign wealth fund with around $773 billion in assets under management, is continuing to cut back on the proportion of those assets looked after by external managers.

In its 2015 annual review, published Wednesday, ADIA said around 60 percent of its assets are managed externally in areas including equities, fixed income, money markets, alternative investment, real estate, infrastructure, and private equity. This is down from around 75 percent in 2013.

ADIA said it uses external managers to “capture alpha” – or market beating returns – as well as managing its exposure to market tracking “beta” strategies.

“The use of external managers also ensures that ADIA retains up-to-date knowledge and is kept abreast of developments across the investment industry,” it added. “While we have a clear focus on investment performance, our preference is to have long-term relationships with our external managers.”

ADIA allocates between 2 percent and 8 percent of its assets to private equity, between 1 percent and 5 percent to infrastructure, between 5 percent and 10 percent to real estate, and between 5 percent and 10 percent to credit.

Commitments to private equity funds made in 2015 include to the €2 billion Equistone Partners Europe Fund V, to the €6.75 billion EQT VII, and to Hony Capital’s $2.7 billion eighth fund, according to PEI Research & Analytics.

On the direct investment side, ADIA teamed up with Danish pension fund ATP, Singaporean sovereign wealth fund GIC, Dutch pension fund PGGM, the merchant banking division of Goldman Sachs, and London-based private equity firm TDR Capital to acquire fleet management business LeasePlan in a $4.05 billion deal.

Earlier this year ADIA also appointed Sherwood Dodge as its new global head of private equity, while Hamad Shahwan Al Dhaheri took over the role of executive director, responsible for overseeing the private equity department’s activities.

In its report, ADIA said that while the private equity industry put in a solid performance in 2015, “a combination of high valuations, increasing competition and raising interest rates in the U.S. are likely to have a dampening effect on absolute returns going forward.”

ADIA’s overall 20-year and 30-year annualised rates of return in US dollar terms fell from 7.4 percent to 6.5 percent and from 8.4 percent to 7.5 percent respectively between 2014 and 2015, caused, the fund said, by “strong returns from the mid-1980s and 1990s falling out of the rolling averages over the periods in question”.

However, ADIA noted a “backdrop of slowing global growth”, against which its investment strategy “will remain focused on identifying long-term trends and patiently growing capital”.

The fund drew attention to China and India, dominant emerging economies that are commodity consumers, as bright spots well-positioned for growth in the years ahead.

“China is making great strides in integrating its capital markets into global markets, and there are optimistic signs that India is seeking to open its markets to trade and outside investment,” ADIA said. “In both cases these are processes, not events, and we look forward to continued progress on these fronts and offering our support wherever possible.”