ADIA at 40: Lessons learned from interviews with Abu Dhabi's wealth fund

Over the past two weeks, the Abu Dhabi Investment Authority (Adia), one of the world’s biggest sovereign wealth funds, gave The National unprecedented access to mark its 40th anniversary, offering interviews with several of its former and current leaders, including Hareb Al Darmaki, the adviser to the managing director and the fund’s longest-serving employee, and Jean-Paul Villain, its top strategist.

My conversations with these investment gurus provided a fascinating insight into the inner workings of a fund esti­mated to have as much as US$800 billion under management. They also helped to reinforce important lessons that are relevant to all investors, whe­ther you have billions of dirhams or simply a few thousand to sock away for the future.

For despite its size and complexity, what became clear from my conversations is that a large part of Adia’s success can be at­tri­buted to a few simple prac­tices – put the bulk of your assets into index funds; be sure to div­ersify; and don’t get distracted from your long-term goals by short-term noise and volatility.


These three principles, often touted to individual investors in the personal finance pages of any newspaper, arose again and again in my conversations at Adia.

The executives I spoke to em­pha­sised during my interviews the importance of diversification and indexing to the fund’s long-term success, and how crucial it has been to stay the course despite market setbacks. The last one is especially relevant today, when share market volatility, low oil prices, productivity concerns, unprecedented monetary policy and a range of other macroeconomic factors dominate headlines around the world.

“Adia has witnessed much in its history, from market booms to steep declines, and wide swings in commodity prices,” Sheikh Hamed bin Zayed Al Nahyan, the fund’s managing director, said in an open letter this week. “The responsibility we hold requires us to navigate with a steady hand through all conditions, never losing sight of the horizon.”

While individual investors should look closely at their specific needs and seek as many insights as possible before making investment decisions, Adia’s example of staying foc­used on long-term goals is one that all investors would do well to heed in the current markets.

Just as relevant is a deliberate approach to portfolio construction. More than a decade ago, Adia decided to move a large portion of its assets under management into passive strategies to avoid paying fund managers money needlessly. Today index investing accounts for about 50 per cent of its assets. It still invests actively, to complement its passive portfolio, but prefers to focus its energies on those funds with unique or very tar­geted strategies that improve their chances of outperformance.

Independent research has shown that in any given year, only 25 per cent of fund managers beat their benchmarks, so small investors are usually better placed to avoid actively managed funds and stick with ones that promise just to track the performance of an index and take a sliver of the fees that active managers charge. Those fees can eat up into returns in the long run.

In practical terms, the final takeaway from my meetings at Adia is to diversify across different asset classes to spread your risks, lower the volatility of your portfolio and ensure you have funds that are quickly acces­sible in case you need to dip into them for some emergency. Look beyond stocks and bonds into a mix of assets, including, for example, real estate investment trusts and commodities.

While Adia does not report detailed financials, it does produce an annual review that provides a broad outline of the geo­graphies and asset classes it invests in, as well as giving a high-­level view of how it perceives global economic conditions. It can be downloaded from its website, www.adia.ae, and is worth a read for retail investors curious about where and how one of the world’s largest financial institutions invests.

For the most part, the people I spoke to at Adia concurred with a growing number of market commentators in suggesting that global markets are running out of steam after almost a decade of record-low interest rates, and that the risk of corrections is increasing. If they are right, it will probably pay to be cautious and leave some money on the sidelines so that you can re-enter at lower valuations.

mkassem@thenational.ae

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