The Spectator: Inside ADIA

The Spectator, June 2010

The Abu Dhabi Investment Authority – perhaps the world’s largest institutional investor – has had two momentous things happen to it this year.

Most obviously, in March, it mourned the death of Sheikh Ahmed bin Zayed Al Nehayan in a glider accident in Morocco. Sheikh Ahmed was a royal family member, brother of the president of the United Arab Emirates – and managing director of ADIA. The Spectator was in Abu Dhabi when his death was confirmed and the country entered a three-day period of mourning. Meetings were cancelled, hymns and tributes replaced programmed television, and outside ADIA’s gleaming headquarters on the Corniche, coaches lined up to take staff members to the palace to pay their respects.

But after a respectful period, ADIA named Ahmed’s younger brother, Hamed, as the new MD. From the perspective of the outside world, nothing will change: the same family will be in charge and not one person The Spectator spoke to – all of whom have day-to-day interaction with the institution – expect any change in policy or approach from the shift at the top. “I don’t want to be flippant,” says one western money manager, “because I have had no problem at all dealing with these people and was genuinely sad about the accident. But Ahmed to Hamed – it’s even an anagram. That’s something of a metaphor for the continuity you should expect to see.”

See this article as it ran here: Wright_Abu Dhabi (2)

Instead, to observers, one of Sheikh Ahmed’s last acts in office may prove to herald a more significant shift, in pragmatic terms, than any change in senior management. This was the ADIA Review 2009, a 33-page document published less than two weeks before his death.

An annual review might not sound much, but that’s to misunderstand the extraordinary secrecy that has previously surrounded this vastly powerful institution. Until recently, a visit to the ADIA website was an exercise in frustration. There was a picture of a building, a phone number, and a fax number. One would scan the page looking for the links to click through to find out more about investments, assets, philosophy – anything. But there weren’t any links. That was it: that picture of the building was all ADIA was prepared to disclose to the world about its operations.

And what operations they are. The precise figure for assets under management has always been a closely-guarded secret, and one not revealed by the new report, but the sheer range of estimates – from US$300 billion to, pre-financial crisis, as much as US$1 trillion – gives an impression both of the scale of wealth and the crushing lack of reliable knowledge outside ADIA itself about just what that scale is. (Informed voices put the true range at between US$400 and US$500 billion – but that’s hardly pinning it down. The gap between the two figures is bigger than, say, Vietnam’s entire economy.)

There are things we have always known, usually triggered by ADIA breaching some disclosure threshold somewhere in the world and being required by a local regulator to state its holdings: we know it is the second-biggest shareholder in Citigroup (and is suing it for misrepresentation, but that’s another story); that it bought a stake in Gatwick Airport this year; that it used to hold a stake in Manchester United, but ditched it, uncomfortable with the attention it brought. But we only really know what a third party regulator has required it to tell us.

One of the main reasons the true asset figure has never leaked is that hardly any of the 1,200-strong workforce at ADIA know what it is. Even to an extremely senior level of internal portfolio manager, the number is a secret. Those who have worked there describe ADIA as an incredibly siloed organisation: you know what your mandate is but you have no idea how it fits into the broader, overall strategy. Some say they didn’t even know what the person at the neighbouring desk was responsible for.

Against such a backdrop, a 33-page review is an absolute milestone. So what did it tell us, and what does it mean for the west?

A few highlights: ADIA is truly global in its investments, from Australia and New Zealand to most Asian and southeast Asian nations, most of the Americas, all of Europe bar the Balkans, and a few pockets of Africa like Morocco, Egypt and South Africa. Another: ADIA’s staff is more international than many had expected, with only 31% of the staff Emiratis. The biggest chunk – 36% – are Asian and 40 nationalities are represented. This fits in with reports from many who have worked there that a silo within the business will be run by a local, with foreigners immediately beneath them.

The British and international industry most likely to be affected by the report is funds management – particularly since most multinationals service the Middle East sovereign wealth funds out of London. This report tells us that some 80% of ADIA’s assets – whatever their true total – are up for grabs for external fund managers, with only one fifth, smaller than most expected, handled in-house by ADIA’s sophisticated internal portfolio management teams. But there’s a catch: we also learn that 60% of ADIA’s money replicates indices – that is, it goes to passive strategies. The single biggest thing we learned from this document is that groups like Barclays Global Investors and State Street, masters of the passive approach, are making some very good business in the Middle East.

The next thing we learned is that for all its famed sophistication, nouse and innovation – it is a first mover in all sorts of asset classes, active in alternatives since 1986 and private equity since 1989 – ADIA has not, it seems, been all that good. ADIA has taken a tentative approach to disclosing performance, opting only for exceptionally long-term 20- and 30-year numbers, but over the 20 years to December 31 2009 it returned 6.5% a year.

“That’s not particularly impressive,” says one fund manager. “You’d expect that from a well-diversified bond fund.”

But why is ADIA telling us even this? It doesn’t have to tell us a thing: never has done. For years, Middle East sovereign funds like ADIA, the Kuwait Investment Authority and Qatar Investment Authority have reacted with detached bemusement at calls from Western governments for greater transparency among sovereign funds. Why, they ask? What’s it got to do with them? The KIA, for example, has been managing money for more than half a century without ever feeling much of a need to tell the world at large what it’s doing with it.

Ahmed’s letter in the report – which will now stand as his parting remarks to the world – starts to explain what’s changed. He spoke about “the value we attach to our most important asset – our reputation”, and this provides a first clue. As the world became increasingly aware of the scale of sovereign wealth, scrutiny increased, peaking in 2007 before the global financial crisis put other matters on the world agenda. There was a sense, largely misplaced, that these institutions were threatening and destabilising, particularly as they came to own increasingly large positions in American banks.

Those who have dealt with sovereign wealth funds say that most of them, and certainly ADIA and the KIA, invest responsibly and that the fears are misguided. “There is a directly inverse relationship,” says one fund manager, “between somebody’s willingness to shout about all this and their having anything sensible or informed to say.” But it appears eventually to have bothered Abu Dhabi’s royal family that its reputation was suffering through lack of openness – and hence this first step.

So in 2008, ADIA agreed with the US Department of the Treasury and Singapore’s sovereign wealth fund, GIC, a set of policy principles and standards for sovereign funds. Later that year it took on the co-chair role of a working group of 26 sovereign funds which produced the so-called Santiago Principles on sovereign investment. Dubai’s absurd handling of some of its own investment ambitions may also have triggered a desire to differentiate itself as smart and conservative.

So what do we learn for the west from all this? Well, ADIA is not one of the funds that tends to storm in to western markets with brazen bids for stock exchanges, waxworks or supermarket chains – that’s Qatar’s young upstart, the QIA. But ADIA’s disclosure is likely to prompt other previously secretive institutions to do the same thing and tell the world more about how and why they invest. ADIA is also a role model for fledgling sovereign funds – the Libyan Investment Authority, for example, reportedly aspires to look like it one day – and if they follow the ADIA model of putting four fifths of their money into foreign hands, that will constitute great news for London’s money management industry. But really there was only one message ADIA really wanted to get across to the West: don’t be scared.