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Abu Dhabi’s Sovereign Fund Cuts Back on External Managers

The Abu Dhabi Investment Authority invested 55 percent of its assets with outside fund managers last year, a big drop from 2011.

  • By Amy Whyte

Abu Dhabi’s sovereign wealth fund, one of the world’s largest institutional investors, continued to scale back its use of asset managers last year in a shift toward managing more of its assets in-house.

In its 2017 report, released on Monday, the Abu Dhabi Investment Authority said roughly 55 percent of the portfolio was managed by external fund managers, down from 60 percent the prior year. In 2011, 80 percent of the fund was run by outside managers.

Institutional Investor’s Sovereign Wealth Center estimates that ADIA had about $633 billion of assets at the end of 2016, placing it among the top-five largest asset owners worldwide. Its investing activities are currently supported by a staff of 1,700, according to the wealth fund's 2017 report.

ADIA said it saw an uptick in long-term performance after its portfolio last year produced returns in “high double-digits” despite lackluster results from global bonds. The fund's 20-year annualized gain stood at 6.5 percent at the end of 2017, up from 6.2 percent a year earlier. That compares with an annualized return of 6.9 percent in the 20 years through 2011. 

The fund’s reduced reliance on outside managers has come with no apparent changes in the fund’s long-term policy portfolio. Allocation targets to equities, bonds, credit, alternatives, and private markets have changed only slightly since 2009, the first year that ADIA published an annual report.

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Within alternatives, the wealth fund restructured its private equity department in 2017 as it continued to increase focus on direct investments made alongside partners. The group is now made up of regional teams, with an aim to develop expertise in five “key” areas: financial services, healthcare, industrials, technology, and consumer-oriented sectors.

While ADIA said it remained committed to investing in private equity, the fund warned that current high valuations and increasing competition among market participants could result in lower returns going forward. 

In addition to private equity, ADIA said it continues to use outside managers across a range of investments including equities, fixed income, hedge funds, real estate, and infrastructure. Some are used to seek alpha; others are meant to deliver index-like returns.

At the end of last year, roughly half of ADIA’s assets were invested in index-replicating strategies, a proportion that has remained fairly constant over the last three years. Over a longer period, the sovereign fund has gradually become more actively managed. As recently as 2014, 55 percent of the portfolio was invested passively. In 2011, 60 percent was in index-like strategies.

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