Successful business management: ADIA's wealth to surge by $30 billion

Sarah Herman

According to the Institute of International Finance (IIF), successful management following the global financial crisis will lead to a surge in wealth for Abu Dhabi Investment Authority (ADIA), of about US$30 billion.

In 2009, successful business management managed to boost ADIA's assets by almost US$50 billion and the IIF, a key Western financial organisation, has predicted that this surge is set to continue over the next year.

The rebound in the assets of ADIA, which is ranked as the world's largest sovereign wealth fund, follows a US$45 billion loss in 2008, which, says the IIF, was due to the global fiscal distress that occurred in September that year.

At the end of 2008 ADIA's total wealth was said to stand at around US$310 billion, but by the end of 2009 this had increased to approximately US$360 billion. The IIF have forecasted that, provided ADIA continue successful business management, this figure will rise to US$390 by the end of 2010. The IIF believe this increase will continue and that, by the end of 2011, ADIA's assets will reach a record high of US$430 billion.

ADIA's assets disclosure

In March 2010, ADIA made its most extensive disclosure of its holdings to date, under a voluntary commitment ADIA previously made to the Santiago Principles in 2008, thereby allowing the IIF to release their future calculations and projected forecasts for the sovereign wealth fund for the first time.

The majority of ADIA's assets are comprised of bonds, equity and investments in the West. The last oil boom, which took place from 2002-2008, saw ADIA's assets rise steadily, until the oil boom came to an end and ADIA's assets fell considerably due to market losses.

ADIA's recent disclosure revealed average annualised returns of 6.5 percent during the past 20 years and 8.1 percent during the 30 years until the end of 2009. This ultimately means that the fund has earned US$10.1 for every dollar invested in 1979, and US$3.5 for every dollar invested in 1989. According to some analysts, these profits are rather conservative when considering that if the fund had deposited all its assets in index-linked assets (Exchange Traded Funds) tracking the Dow Jones Industrial average, it would have earned more during the same time periods.

However, ADIA's revealed that this is because more than 60 percent of its assets are linked to a conservative indexation strategy and it could be precisely because of this conservative investment strategy that ADIA's business management has been so successful.

CFR predicts higher surge wealth

The United States Council on Foreign Relations (CFR), does in fact place estimates of ADIA's assets at a higher figure than the IIF does, placing the fund's financial resources at about US$453 billion at the end of 2007 and US$328 billion at the end of 2008.

According to the CFR, in 2008 ADIA's market losses amounted to approximately US$183 billion, but placed estimates of net cash flow at around US$509 billion. The CFR reached this conclusion by analysing ADIA's business management of Abu Dhabi's hydrocarbon exports, which hit an all-time high of over US$90 billion in 2008.

Although ADIA's business management is largely conservative, the fund's disclosures also revealed certain, albeit smaller ventures into riskier terrain. For example, property, hedge funds and small companies, which are all riskier asset classes, each comprise 10 percent of ADIA's portfolio. The fund also retains around 10 percent of its assets in cash.

Oil prices are likely to continue rising said the IIF and this is likely to have a positive impact on ADIA's business management and overall assets. The IIF estimated that the rising prices of oil last year led to almost US$58.1 billion in earnings for ADIA and the IIF forecasts that ADIA's business management will lead to a huge soar in wealth in the coming years, placing projected estimated earnings for ADIA at around US$72.9 billion in 2010 and US$78.1 billion in 2011.

ADIA's restructuring

The death of ADIA's chairman Sheikh Ahmad bin Zayed al-Nahyan in March 2008, after his glider crashed in Morocco, has led to restructuring within the sovereign wealth fund and has raised questions about how business management will proceed in future. He was replaced as chairman by his brother, Sheikh Hamed bin Zayed al-Nahyan, who, according to analysts, may take a different approach to the business management of ADIA.

Sheikh Hamad will of course continue to manage corporate relations established during his brother's tenure, which include several large investments in the United States and United Kingdom. This includes considerable investments in the property market; ADIA's UK residential portfolio is estimated to have cost the fund around US$4 billion. Sheikh Ahmad also led the controversial US$7.5 billion acquisition of 4.9 percent of Citigroup in 2007.

It is thought that Sheikh Hamad may opt for more aggressive business management, due to the fact that ADIA has underperformed against the Dow Jones industrial average. Sheikh Hamad may take some time to implement this strategy and would therefore continue his brother's more conservative approach initially but he is likely to start making more fundamental changes to ADIA's business management as the global economy improves.

As the global financial crisis is alleviated, Sheikh Hamad's decisions concerning buyouts and acquisitions are less likely to be influenced by political considerations and it is thought that further disclosure of ADIA's assets and business management could cease: it is probable that protection of ADIA's assets will take precedence over disclosure of the fund's wealth.

Related News:

Broadband Networks |Business Process Automation. |Jet card Membership Programme Schemes |A force for change