ADIA: Active management, sharper internal processes pay off

Restructuring its internal processes has reshaped ADIA’s investment approach and highlights opportunities in active investment ahead.

ADIA, Abu Dhabi’s sovereign wealth fund with an estimated $700 billion under management, has spent much of the last year honing internal processes. A key element has included strengthening its core investment and support activities through the creation of two complementary and interlinked departments – the core portfolio department (CPD) and the central investment services department (CISD).

Together CPD and CISD enable ADIA’s management of the total portfolio, particularly supporting agile implementation, says the fund in its recently published Annual Review. CPD is responsible for implementing the fund’s benchmark exposures, managing its treasury-related activities and executing equity, fixed income, money market and currency trades.

The department has also built its internal quantitative capabilities, seeking to extract higher returns from a single core portfolio of public equities and fixed income assets. As internal teams take on more responsibility, about half of ADIA’s assets under management are now externally managed. In 2009, 80 per cent of the portfolio was externally managed.

CISD, meanwhile, seeks to strengthen the investment processes by enhanced operational support activities, data services and total portfolio support activities. The team also play an integral role in harmonizing ADIA’s technology systems, while acting as a key source of visibility and intelligence on its overarching portfolio exposures and correlations.

This operational flexibility allowed the fund to make swift portfolio adjustments as market conditions evolved through 2022. It also positioned the fund to capture pockets of absolute return across asset classes bringing the benefits of its diverse portfolio to the fore in a year when bonds and equities correlated.

As ADIA has improved its internal efficiency, it has reduced the headcount in support functions. This has been offset in part by active recruitment in investment areas, particularly in private markets and technology-driven specialisations – ADIA’s famously diverse headcount (from 64 countries) is currently 1,380.

Tech prowess can be seen in its purest form in the Quantitative Research & Development team. Comprising a multidisciplinary group of more than 50 experts, the team uses complex models to analyse data, generate investable ideas and put them into production, organised as a problem-solving machine. In 2022, the division implemented its first investment strategies and is continuing to recruit globally-respected experts in diverse areas such as machine learning, strategy development and portfolio construction.

Another example can be found in ADIA’s fixed income department, which has sought to diversify its sources of return with quantitative strategies, building out its internal team of specialists and implementing robust risk-management processes. The real estate department is also harnessing the power of data and cutting-edge quantitative methodologies for portfolio strategy, optimisation, and risk management.

In its annual review, ADIA signposts higher inflation and borrowing costs will impact asset valuations, future earnings and growth prospects with challenges and opportunities. This environment will also complicate diversification strategies and erode the real value of assets with fixed returns, such as cash or bonds. However, equities – both public and private – should continue to find support, especially if profitability remains resilient despite lingering tensions in supply chains and the availability of labour.

This backdrop may also increase the appeal of physical assets and alternative approaches that are better suited to managing inflation risk. One positive consequence of this trend may be greater alignment between investment and impact, particular in infrastructure. Advanced computing technologies such as artificial intelligence, machine learning, and data analytics will be the biggest opportunities.

Active strategies opening up

ADIA also believes opportunities are opening up for active strategies. It’s equities department (EQD) continues to concentrate its active management capabilities in areas with structural advantages and strong prospects for future relative growth. In 2022, EQD complemented its existing risk exposures in preferred markets by allocating additional capital to high turnover strategies with low volatility. It also added several high conviction strategies with higher volatility profiles.

The more favourable environment for active managers. This contrasts with the “beta trade” of recent years, in which a rising economic tide carried most growth stocks higher, while punishing investors who sought to differentiate companies by relative valuation, among other factors.

In 2022, the fixed income department (FID) continued to capitalise on its fully active mandate, having transferred its passive investments to ADIA’s CPD a year earlier. FID’s inbuilt flexibility enabled it to navigate the complex market conditions by targeting return-enhancing opportunities across the full spectrum of fixed income assets.

In mid-2022, this team began to deploy capital in targeted strategies, with positive returns, and they plan to develop this further in the year ahead. As a result, FID is structured to pursue diversified outperformance from three core teams: Internal, External, and Quantitative.

Private equity opportunities

In private equity, ADIA’s commitment of new capital in 2022 was divided roughly equally between direct investments and funds, alongside an increased allocation to secondaries. In total, the department completed 24 direct investments of more than $150 million across its core regions and sectors of specialisation, in line with 2021. Meanwhile, it was able to take advantage of the market’s capital scarcity to support and invest in new secondaries and direct lending platforms.

ADIA continues to expand its operating advisors network, useful in an unsettled economic backdrop, in due diligence, portfolio management activities and digital transformation. Looking ahead, the team is positioning for the continued growth of private equity markets including private credit as an increasingly important alternative to traditional bank lending.