INVESTOR PROFILE

Abu Dhabi Fund eyes equities but hits valuation wall

altA big, multi-billion dollar scheme, the Abu Dhabi Retirement Pensions and Benefits Fund began deploying its capital across global markets in 2005. Simon Mumme speaks to chief investment officer Stefan Cowell about the fund’s current investment appetite and the steep learning curve it is charting.

For many pension fund executives, Stefan Cowell and his investment team are in an enviable position.

“We’re so new, and we don’t have any baggage,” the Canadian-born investments chief at the Abu Dhabi
Retirement Pensions and Benefits Fund says.

“We’re very fortunate that we can look at well-established plans, the challenges they’ve faced, the lessons they’ve learned and hopefully we will avoid any mistakes they made.”

Travelling to meet the heads of large, well-regarded pension funds in North America, the UK, Europe and Asia, Cowell gained insights into the thinking and operations behind their portfolios, services to members, and key achievements and setbacks to help inform his work in Abu Dhabi.

“We spent a lot of time making sure we knew which practices would work if transferred into this environment.”

So far, the fund has performed well in its four-year investment life. Its portfolio, diversified across asset classes and markets around the globe, has outperformed its benchmark, which is a composite of standard benchmarks for each asset class such as the S&P500 and Lehman Brothers US Aggregate Index.

Currently, Cowell and his eight-person team “spends at least 60 per cent” of their operational time on global research to source investment opportunities.

“We spend a lot of time in the public equity market. We’re looking at making further allocations there and are spending a lot of time in private equity.”

Most of its investments are run by external asset managers, but allocations within the United Arab Emirates (UAE), and direct acquisitions and co-investments in infrastructure and private assets, are pursued by internal resources.

“We have people looking at listed and unlisted, taking large, direct stakes in things.”

This team has found that unlisted markets still harbour asset sellers reluctant to acknowledge the damaging impacts of the financial crisis on the valuations of their holdings.

“We believe the market was very frothy last year. Valuations were too high. We made a call, and we were right.”

Turning recently to the private equity secondaries market in search of marked-down yet attractive assets, the fund was confronted again by the difficulty in finding good valuations.

“Our biggest challenge is finding the true value of assets right now. If we don’t understand where the cashflows, the revenues, the growth is coming from, we don’t invest.

“We don’t just buy something because it’s cheap.”

Even when decent valuations are provided, accurate analysis of the asset’s true worth must be performed.

“In some areas, valuations are definitely reasonable. The big challenge is figuring out how that valuation has been determined. The key to success in private and direct deals is how you perform valuations.”

Cowell says none of the fund’s assets are managed by any of its better known neighbours – the emirate’s mega sovereign wealth funds, such as the $627 billion Abu Dhabi Investment Authority and the Abu Dhabi Investment Council. Nor has the fund entered into any co-investments with the institutional giants.

“We have definitely looked at opportunities together, but we haven’t found one that met all of our respective objectives.

“We do talk to them a little about some of the things we’re doing because we’re not competitors, but we do have different risk and return profiles.”

The fund’s liabilities are primarily driven by inflation in the UAE economy. Because of the demographic of its membership – unlike most defined benefit pension funds in developed markets, most of its members are employed and some years away from retirement – it can allocate more aggressively to growth assets.

Even with its focus on capital appreciation and growth-heavy asset allocation, the fund did not make any temporary or significant changes to its strategy as the financial crisis struck and market conditions rapidly deteriorated – although its portfolio was the subject of constant monitoring and analysis.

“We examine the strategy once a year to make sure we’re on target, and evaluate our liabilities each year. We don’t expect to make significant changes to the asset mix because we’re confident we have the direction right and the relative magnitude right.”

This strategy was informed by research and advice from Mercer and Callan Associates, while management consultancy Booz & Company was hired to develop best-practice benchmarks based on the successful services provided by the offshore pension funds that Cowell visited.

One notable member services initiative recently undertaken by the fund was to periodically run temporary service centres in remote areas of the emirate to engage older members who weren’t familiar with computers or virtual communications technologies, and inform them of available services.

“This is part of our valuable Outreach Program. You and I use a computer like it’s our air. How do you make sure that you reach out to pensioners in far, remote locations, who don’t have a computer or mobile phone?”

Membership in the fund is compulsory for all UAE nationals working in the government, semi-government or private sectors of Abu Dhabi.

These employees contribute 5 per cent of their salary to the fund, which is boosted by a 15 per cent contribution from their employer, and another 6 per cent from the government of Abu Dhabi.

Cowell is considering hiring more people into his investment team. As in other Abu Dhabi businesses and government
operations, many new roles are reserved for Emiratis.

“We will continue to hire fresh Emirati graduates to build the strength and augment the experience in our team. In time there will be more Emritatis with experience in institutional fund management operations,” Cowell says.

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