The Abu Dhabi Investment Authority, the state-owned investor with an estimated $700 billion assets under management, is introducing more technology in its own internal processes and determined to become a more active – and reactive – investor.
The fund’s decision to invest more in its own in-house technology came with the realisation that a slow down in its capacity to generate alpha was linked to a lack of investment in big data and AI. The fund’s early installation of new technology like Bloomberg terminals and other small data banks in its investment office 25 years back had bred a complacency that meant it was late to adopt and build a critical mass around new technology, said Jean-Paul Villain, ADIA’s director of the strategy and planning department, speaking at FIS Digital 2021.
ADIA only reports two performance numbers, for 20 years and 30 years annualized. As of December 31 2020, the figure was 6 per cent for 20 years and 7.2 per cent for 30 years.
Now ADIA is making up for lost ground investing in different kinds of quantitative approaches, collecting, cleaning and testing data to apply across the portfolio from long short equity allocations to tactical positions and facilitate access to the best managers – around 55 per cent of the portfolio is externally managed.
“We were seeing technology everywhere, but not very much in our own strategies,” said Villain. “We realised we had to start again.”
In another new seam, the fund is pushing more actively into private assets, especially private equity and infrastructure where it first invested in 1992 and 2005 respectively. The new focus is on building partnerships and targeting specific strategies; rather than invest much directly ADIA seeks co-investment opportunities in a new active and concentrated approach.
“We started years ago, so we have some experience,” he said.
The strategy was recently visible in ADIA joining a private equity led group that includes Canadian pension plan CPP Investment Board and Singapore sovereign wealth fund GIC behind the purchase of antivirus software company McAfee, in advanced talks to go private in a deal worth more than $14 billion.
More active means being more reactive. Like many institutional investors ADIA had fallen into the habit of waiting for change, said Villain. Now, the giant fund plans to be more granular in its approach, better able to react to increasingly apparent correlations between geographies and asset classes. “There is more correlation between buckets and countries than what we had twenty years ago.”
ADIA’s fixed income allocation (15-30 per cent) is a particular focus. Villain, who has been at the fund since 1982 bar a five-year absence well remembers years of stellar 7 per cent annual returns in liquid sovereign debt allocations in stark contrast to today.
ADIA invests in fixed income for returns but mostly to ensure liquidity on hand, needed to manage inflows and outflows in open ended activities, rebalance the portfolio following investment in opportunities and reduce volatility.
“Fixed income has different functions; we work out how much we need for each function and try to reduce it,” he says, describing fixed income’s role as bringing structure to the whole portfolio.
ADIA’s large asset allocation bands comprise equity (43-67 per cent) fixed income (15-30 per cent) alternatives and real assets (17-30 per cent) and cash (0-10 per cent cash)
Inflation’s impact on the fixed income allocation and valuations in real assets is another key focus. For sure, an inflation level of 3-4 per cent, especially as it is associated with higher economic growth, isn’t all bad. Moreover, its negative impact on fixed income is offset by its positive impact on other parts of the portfolio. The inflationary push pull on the portfolio plus questions around whether it is transitory or here-to-stay leave him reluctant to take a single view on its arrival on the economic landscape.
The economic bounce back in the wake of COVID accounts for one inflationary cause.
“We had a politically induced recession followed by politically induced recovery,” he says, adding that many companies have been shocked by the speed of the recovery and demand outstripping supply. “This maybe transitory.”
Another, longer-term, inflation cause is coming via societal shock and change particularly captured in the real estate market. People value a larger house, balcony or garden more than their short commute, he says.
The structure of the housing market can’t respond quickly and is taking much longer to adjust, he concluded.