Abu Dhabi's sovereign fund returns drop

26 June 2012

Eurozone crisis weighs on Abu Dhabi Investment Authorities returns as fund increasingly turns attention to emerging markets

The Abu Dhabi Investment Authority (Adia), one of the largest sovereign wealth funds in the world, has reported a slight deterioration in returns, expected to be a result of problems in the eurozone.

The fund said in its 2011 annual report, released on 25 June, that 20-year annualised returns dipped from 7.6 per cent in 2010, to 6.9 per cent last year. Thirty-year returns, remained the same as in 2010, at 8.1 per cent.

Sheikh Hamed bin Zayed al-Nahyan, managing director of Adia, said in the annual report for the fund that although 2011 was a challenging year, it was viewed more favourably in emerging markets than it was in developed markets. A reflection of Adia’s strategy to shift its emphasis away from the West and into faster-growing emerging markets.

In particular, he identified the “absence of clear guidance from policymakers and central banks” in the eurozone as a cause of “unpredictable and unwelcome” movements in the financial markets. Adia allocates 25-35 per cent of its estimated $324bn of assets to Europe. Exact breakdown’s of asset allocation are not given, but the fund does say that 35-50 per cent of the fund’s assets are in North America, 10-20 per cent in developed Asia, and 15-25 per cent in emerging markets.

Sheikh Hamed added that “widespread downgrades to the credit ratings of developed economies,” were in contrast to the “continued strengthening of many emerging countries.”

The shift towards higher growth markets has been under way for several years within Adia, and looks set to continue as part of a wider process of shifting the economies of the Gulf more towards Asia and away from Europe.

Emerging market equities make up between 10-20 per cent of Adia’s allocations, with developed market equities taking up the largest chunk at 35-45 per cent. Government bonds are about 10-20 per cent, real estate 5-10 per cent, and private equity 2-8 per cent. Infrastructure currently makes up only about 1-5 per cent of Adia’s investments. Gulf sovereign funds are coming under increasing pressure to invest more resources in much-needed regional infrastructure to help fill the shortfall left by international banks.

Foreign banks are increasingly wary of investing long-term in projects as a result of the eurozone crisis and the impact of new banking regulations, which will make infrastructure lending less attractive for banks.

Adia’s annual report, which is released just nine months after the 2010 report, is part of the sovereign funds strategy of improving transparency in the wake of criticism of the opaque nature of investments by Gulf states and scepticism about political motives behind their investments.

The report makes clear that Adia invests “without reference to government of the Emirate of Abu Dhabi, or other entities that also invest on the government’s behalf”.

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