Sheikh Ahmed, The Last Interview



The Last Interview

The last interview with HH Sheikh Ahmed Bin Zayed Al Nahyan, managing director of the Abu Dhabi Investment Authority was published in Germany’s business daily newspaper Handelsblatt on January 11, 2010.  In the following extracts he discussed the role of ADIA, investment philosophy and the political might of sovereign wealth funds.

To many people, there is still a lot of mystery around sovereign wealth funds and how they operate. How would you define ADIA?

ADIA’s sole mission, which has not changed in over 30 years, is to secure and maintain the current and future welfare of the Emirate of Abu Dhabi. This ensures that our investing strategy stays focused on long-term trends rather than the ups and downs of individual cycles.

The global economy has been hit by an unprecedented crisis. What further risks do you see coming up?

While attention now is on the recovery, we can’t lose sight of the many substantial risks that still exist. Many of these, such as high government deficits and high unemployment, are already well known. But protectionism also remains a threat.

Could you give us an example of what you mean by protectionism?

It is essential to maintain the free flow of capital between countries, and ensure that cross-border investing is not stifled by restrictive measures that may be popular within individual markets in the short term but ultimately leave us all worse off.

The world economy is still in a fragile state, and we must not jeopardise its recovery and future economic growth by building barriers to investment and shared success.

What has to be done to prevent further shocks of that magnitude?

It is clear that the financial regulatory architecture has not kept up with the increasingly global and interconnected nature of financial systems – or the pace of innovation.

We support the ongoing discussions taking place around the world on issues such as the need for greater controls on the use of leverage, mechanisms to ensure appropriate pricing of risk and increased transparency in all credit instruments, among other areas. In the case of some of the more complex financial products developed in recent years the risks have also been too difficult to quantify, leading to unexpected consequences during severe market shocks. This is why ADIA has avoided them.

What consequences will ADIA draw from the financial crisis?

I think the latest downturn has also served as a powerful reminder to all investors of the importance of risk management, and of having controls that act as a brake on excessive risk taking during bull markets.

At ADIA, taking a long-term view is at the core of everything we do. Take, for example, the issue of compensation.

We believe in rewarding employees based on various factors that may include beating return targets but also their broader contribution to the organisation as a whole. Our compensation programme has always had a smaller variable component than many investment institutions but a greater emphasis on fixed pay and various other benefits.

This keeps us competitive in attracting world class talent, but also encourages our employees to focus on what’s best for ADIA over the long-term rather than looking for ways to boost their short-term personal gains.

Will ADIA become more risk averse in the future? 

We believe in managing risk, not avoiding it. Our strategy always begins by identifying an acceptable level of risk and then looking for ways within those parametres to maximise returns over the long-term. This approach has served us well.

Since March 2009, the global stock markets have been recovering. To what extent did these gains outweigh ADIA’s losses due to the financial crisis?

Our investment strategy is always to look beyond individual cycles and focus on capturing long-term growth trends, even during economic downturns as severe as that of the past two years.

But, naturally, we also have the ability to make short-term adjustments that minimise the impact of falling markets and allow us to capitalise on any recovery. That is why in early 2008, as equity markets were coming off their peaks, we took the decision to raise our level of liquidity.

Early in 2009, meanwhile, we began cautiously increasing our exposure once again to higher growth markets, which proved effective as economic conditions improved and markets recovered lost ground. Together, these actions certainly allowed us to beat our own performance expectations and to compare favourably with the published results of other investment institutions.

Coming out of the financial crisis, which investment philosophy will ADIA pursue in 2010?

Our philosophy is unchanged. This is not the first major downturn that ADIA has experienced and it won’t be the last.

Our success is based on generating steady results over time through diversification strategies focused on long-term value creation. We won’t seek management control of companies in which we invest or invest for anything other than purely commercial reasons.

We believe in “active beta,” which involves using extensive research and analysis to develop a vision of where the world is heading over the coming ten to fifteen years and positioning ourselves appropriately to take advantage of those structural trends. This is an intense process involving more than two dozen asset types with fixed weights that reflect ADIA’s vision.

Has the financial crisis led to a gradual change or shift of ADIA’s portfolio?

Great caution needs to be exercised before making long-term portfolio adjustments, especially in the middle of a major downturn when visibility is significantly reduced. Instead, we have the ability in extreme situations to deviate on a temporary basis from our agreed weightings across asset classes in order to further reduce the impact of downturns. This approach served us well during the events of the past eighteen months.

Does ADIA have some short-term obligations to contribute to the UAE budget due to shortfalls in the wake of the crisis?

ADIA is not involved with nor has any visibility on matters relating to the spending requirements of the Government of the Emirate of Abu Dhabi.

However, the Abu Dhabi government can, at any time, request funds from ADIA to meet its short-term needs, and this has happened a few times in our history. But how and for what purpose those funds are used is strictly a private matter for the government. Our responsibility is to manage ADIA’s portfolio in such a way that ensures we have sufficient cash and other liquid investments to meet any such request from the government without having to resort to selling other assets, especially when markets are weak.

Some sovereign wealth funds have said that in the future they may focus more on the Middle East. Could that also be an avenue for ADIA, even though it exercised restraint in the past?

ADIA already has exposure to Middle Eastern markets in line with their weightings in global indices and we remain open to opportunities. But ADIA’s primary focus is to invest outside the region as a means of diversifying from the relatively correlated, commodity-driven economies of the Middle East.

It is also important to note that we do not, as a matter of practice, invest within the UAE. There are other Abu Dhabi government entities that fulfill that role.

Is there co-operation and co-ordination between the UAE sovereign wealth funds? For example, the Abu Dhabi Investment Council, Mubadala and IPIC invest regionally and internationally. ADIA predominantly invests internationally. How do you avoid overlapping investments?

Under Abu Dhabi law, ADIA carries out its investment programme independently and without reference to the Government of Abu Dhabi or other entities that also invest on the government’s behalf.

For this reason, the potential exists for our investment strategies to overlap in some areas although the specific mandates under which ADIA and other government entities operate are sufficiently different to keep this risk to a minimum.

In recent years there was a big discussion in the US and Europe if sovereign wealth funds should be welcomed or not. Has that tension subsided?

I think we have seen two parallel events taking place. The first has been an improved understanding of SWFs, how they invest and why, which has helped to ease concerns that may have existed in some quarters. And the second has been a growing awareness of the important role that SWFs as long-term investors can play as a stabilising influence on markets.

But this is a process that is ongoing and requires openness and trust on both sides. In 2008, ADIA was elected co-chair alongside the IMF of the International Working Group of 26 sovereign wealth funds, which produced a set of generally agreed principles and practices that reflected how their investments are made.

ADIA has enjoyed an excellent and open relationship with governments, regulators and investment partners around the world for more than 30 years and we expect that to continue.