Abu Dhabi: Abu Dhabi Investment Authority (Adia), the emirate’s sovereign wealth fund, said its strategy will continue to focus on the long term amid a backdrop of slower economic growth around the world.
In its annual review, released on Wednesday, Adia said its annualised returns fell in 2015, with the 20-year returns dropping to 6.5 per cent in 2015 from 7.4 per cent in 2014.
The 30-year returns also declined to 7.5 per cent in 2015 from 8.4 per cent a year earlier in US dollar terms.
The decline was primarily due to strong returns from the mid-1980s and 1990s falling out of the rolling averages, ADIA said in its review, adding that the recent return rates were consistent with historical levels.
“Slow growth in developed economies is partly the result of expected demographic changes and partly weaker-than-expected productivity, the latter of which has now lasted long enough to perhaps be structural.
However, we know from experience that productivity growth can slow or accelerate without warning, so it is important not to be unduly pessimistic about the future,” said Shaikh Hamed Bin Zayed Al Nahyan, managing director of Adia.
Lacklustre market returns
He described returns in most financial markets in 2015 as “lacklustre” especially when compared to performance in previous years.
Global equities and bonds delivered negative total returns for the year, while the performance of emerging markets was, once again, lower than that of developed markets. This was mainly due to the drop in the prices of oil and other commodities.
In his letter in the review, Shaikh Hamed said that there were three main trends that were important in defining the economy in 2015; declining energy prices, divergence in economic policies, and adjustment in China.
Policy divergence
By different economic policies, he was referring to the US Federal Reserve’s decision in December to hike interest rates versus quantitative easing (QE) by the European Central Bank.
“Divergences in US and European monetary policies have occurred before but typically have not lasted long. This current episode is being amplified by stubbornly low inflation in Euro area, and may persist for some time,” Adia’s managing director said.
He added, “In the years ahead, investors may benefit less from tailwinds from demographics, falling interest rates, or QE. It will also likely become more difficult to maintain conviction in markets where returns are lower but volatility remains high.
However, this will only increase the importance of discipline and consistency in order to ensure that returns, even if lower than in the past, still compound over time to deliver significant capital growth.”
The review also said that Adia continued to reduce the proportion of its assets that are managed by external fund managers, and instead, rely on in-house teams to manage these assets. In 2015, 60 per cent of the wealth fund’s assets were managed by external fund managers — down from 65 per cent in 2014, and 75 per cent in 2013.
This was part of the fund’s plan to focus on growing its in-house team and boost its recruitment efforts. Adia hired 50 new employees in 2015, and had a total of 1,700 employees by the end of that year.
In early February this year, Fitch Ratings said that Adia’s assets will probably shrink by billions of dollars by the end of 2016 as Abu Dhabi’s government is likely to tap the sovereign wealth fund for liquidity to help reduce deficits.
The credit rating agency said that it expected Adia’s assets to drop to $475 billion by the end of 2016, from an estimated $502 billion at the end of 2014. However, Fitch expects them to rise again in 2017.
