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Looking Into Abu Dhabi Investment Authority's Portfolio

by: Roger Nusbaum June 16, 2008    

Roger Nusbaum

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From BusinessWeek; Apparently the Abu Dhabi Investment Authority [ADIA] wants to simplify its portfolio by having less hedge fund exposure and more index fund exposure with the following allocation.

 

These sorts of things are always useful and interesting. They allocate more to equities than Mohamed El-Erian did in his recent Barron's interview.

ADIA is indexing a lot of their portfolio after a consultant studied the portfolio and pointed out that most of their active managers were lagging their respective benchmarks.

This was a catalyst for ADIA to index 60% of the portfolio to come more in line with some of the better known US endowment funds (60% was the number in the B-week article, I'm not sure if that is how much any of the endowments actually commit to indexing).

El-Erian allocated 42% to regular equities versus a range for ADIA between 54% and 71% and it is also not clear how much of ADIA's equity exposure would go to the US versus El-Erian's 15%.

Accessing the equities and bonds are obviously easy to do (talking access not necessarily quality of selection). The alternative category is sort of wide open. It seems that most of the products that are targeted to this segment have times where correlation is low and other periods where it is high. There are a couple of things out there though seem to have done a good job more often than not that shouldn't be that difficult to find for anyone interested.

The real estate segment is one that for me that might be evolving into one of the farm stocks, perhaps combined with a more traditional REIT or other type of real estate stock. The catalyst for this, well actually two catalysts, are the concern that REITs' correlation to financials went up at the worst possible time and the big macro theme (which I think will have legs for the long term) of food becoming progressively more important.

Private equity is always tricky. There are a lot private equity things that aren't really private equity and for the things that are really PE exposure the market can always do funky things via fear and greed that would be beyond the holder's control that could distort the effect.

Infrastructure as a distinct allocation, as discussed previously, sort of depends on what is selected. Buy Foster Wheeler (FWLT), are you really capturing a separate asset class or just a stock you think will do well? I would say the former. If you buy Malaysian toll road company Plus Expressways (PEXWF.PK) are you really capturing a separate asset class or just a stock you think will do well? I think the latter, but an argument could be made the other way.

The ADIA allocation seems like it would be easier to implement both practically and psychologically. A key difference is that by only allocating 42% to equities, I wonder if El-Erian is questioning whether equities might stop working altogether. If so I would disagree with that notion and just mention again that even if US equities average smaller returns other destination will offer "normal" returns.

The ADIA allocation seems to be just their spin on how to build a diversified portfolio. Obviously commodities are missing, perhaps captured elsewhere in their total portfolio (remember the above just represents a portion) and I would say a little bit in foreign currency might be right for some folks too.

 

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This article has 2 comments:

  •  
    Jun 17 02:54 AM
    Their exposure to commodities is actually the Government of Abu Dhabi's ownership of oil reserves. Therefore ADIA may not need substantial systematic commodities exposure.

    Infrastructure is actually infrastructure literally: buying the actual toll roads and power stations directly, as opposed to buying stocks of companies that operate such roads and stations.
    Reply
  •  
    Jun 17 01:08 PM
    Abu Dhabi's purchase of ten drilling companies and leases in Alberta brings the question--Why? When foreigners are not allowed to purchase anything in that country?
    Reply
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