Abu Dhabi Investment Authority is reducing target exposures to developed market stocks and looking for growth in emerging markets, the sovereign wealth fund that is one of the world's biggest investors said on Monday.
In an annual review which provides rare insights into the strategy of ADIA’s executives, it also gave an ominous signal to asset management firms hoping for its business - it is handling more of its investment in-house and relying less on index funds.
With undisclosed assets that analysts estimate at between $400-$600 billion - equivalent to about 1 percent of the value of the world's major stock exchanges - ADIA revealed the first change in the broad ranges it maintains for different assets since it began publishing an annual review three years ago.
It lowered its target exposure to developed market stocks in 2012 to a range of 32-42 percent from 35-45 percent in 2011 -meaning a reduction at the middle of that range of 7.5 percent.
ADIA also cut its minimum exposure to Europe across its asset portfolio to 20 percent in 2012 from 25 percent in 2011, while keeping its maximum allocation unchanged at 35 percent.
Funds with long-term objectives shift such broad target ranges only rarely, given the flexibility they already offer.
ADIA, which manages the surpluses the Gulf emirate earns from oil exports, maintained its exposure to emerging market stocks in a 10-20 percent band but signaled a growing interest:
“Economic leadership is passing to emerging markets, not just as their weight in the global economy passes 50 percent, but as their share of likely future global growth moves far higher,” Sheikh Hamed Bin Zayed al-Nahayan, ADIA's managing director and a member of the ruling family, said in the review.
The fund raised its exposure limit on Chinese equities to $500 million from $200 million in the third quarter, ADIA said, after securing the approval of the Chinese market regulator.
Sovereign wealth funds generally are focusing on emerging markets and alternatives to traditional securities, such as infrastructure investment and private equity, to offset lower growth prospects and greater volatility in established markets.
At the end of a year of gains in world equities markets, the review showed that ADIA had made a return of 7.6 percent on an annualized basis over the 20 years to Dec. 31, higher than the 6.9 percent recorded a year earlier. Over 30 years, its return was an annualized 8.2 percent, up from 8.1 percent in 2011.
ADIA said it expected equities to remain attractive as bond yields stayed low and investors prepared to take on more risk.
It had started allocating money to non-investment grade bonds and was looking for external managers for such assets.
ADIA said about 75 percent of its portfolio was run by external asset managers, down from 80 percent in 2011. The fund also allocated 55 percent of its assets in index-replicating strategies, lower than the 60 percent it allocated in 2011.
That could be a worrying sign for big global fund managers who market some of their flagship products to the likes of ADIA. It may also offer Abu Dhabi a tighter control on costs.