Sovereign Wealth Funds - Example

Sovereign Wealth Funds of the of the Introduction A Sovereign Wealth Fund (SWF) is any kind of investment fund that is owned by the state. These kinds of funds are generally invested in financial and real assets like bonds, precious metals, real estate, stocks or other alternative investments options like hedge funds or private equity funds. The Sovereign Wealth Funds of different countries are involved in global investment activities. Most of the Sovereign Wealth Funds (SWFs) are funded through the revenues gained by the state from the foreign exchange reserves or commodity exports and the general revenues that are kept as reserves by the central banks of the respective countries. Some of the Sovereign Wealth Fund (SWF) is held by the central banks of the state which keeps the funds as reserves in the process of the management of the national banking system of the respective country. The Sovereign Wealth Funds (SWF) is important from the perspective of the fiscal and economic management of the wealth of a nation. Some of the Sovereign Wealth Funds (SWF) are mere state savings and reserves that are invested with the aim of getting adequate returns and do not have major roles to play in economic and fiscal management. However, most of the Sovereign Wealth Funds (SWF) held by the states in the contemporary business world is focused on enhancing the wealth of the nation and as such play crucial roles in the way of financial, fiscal and economic management of the country. This report will include an analysis of the one of the largest Sovereign Wealth Fund (SWF) in the world which is the ADIA. A section of the report would be dedicated to the analysis of the current investments and functioning of the ADIA followed by suitable recommendations as to how the ADIA can enhance its investment processes and the different areas in which the organization can invest in the future. The report would also include an overall analysis of the ADIA, the future propositions and the role of the ADIA in the economic and fiscal management from a national as well as a global perspective. Discussion The ADIA is currently the largest autonomous Wealth Fund. This SWF is owned b the Emirates of Abu Dhabi located within the United Arab Emirates (UAE). The organization was founded with the aim of investing capital in various investment areas on the behalf of the state government of the Emirate of Abu Dhabi. The organization is responsible for managing the excess crude oil reserves of the Emirates of Abu Dhabi which is estimated to have a valuation of USD 500 million as of 2014. The portfolio of the ADIA grows at a compounded rate of 10% per year. Though the asset values held by the ADIA have not been publicly disclosed, yet the estimated valuation of the assets held by the organization is given as USD 800 billion to USD 875 billion. As per the records of the SWFI, the total value of the assets owed by the ADIA is USD 773 billion as computed in 2014 (Sovereign Wealth Fund Institute, 2014, p.6). The ADIA was found in the year 1976 and functions in the industry of institutional investors. The organization has its headquarters in Abu Dhabi. The current chairman of the ADIA is Sheikh Khalifa Nahyan and the current Managing Director of the organization is Sheikh Hamed Nahyan, who is the key management personnel of the organization. The ADIA is one of the largest investment funds in the globe and manages a substantial amount of fund and capital. The huge size of the ADIA has made it an influential SWF in the domain of international finance. As of 2013, the 20 years annualized returns for the ADIA were 7.6% and the 30 Year annualized return was 8.7%, respectively. Currently, the ADIA is an influential institutional investor which invests in all types of international financial instruments including treasury bonds, real estate, and fixed income bonds, private equity, Commodity Trading Advisers (CTAs), equities, infrastructure and many more. The global investment portfolio of the ADIA is segregated into sub funds which cover particular asset classes. Each of the asset classes owned by the ADIA is managed by in house analysts and dedicated fund managers. All the investments that are made by the ADIA are managed internally as well as externally. Today, the ADIA is a major buyer of the real estate market of the United States of America. The authority invests in the real estate segment through sub entities who invest on the behalf of the authority in the foreign markets. Additionally, the ADIA continues to invest in the real estate segment through the strategy of entering into partial interest ownerships with the real estate managers in different geographical regions. The Authority focuses on generating stable returns from their respective global investments through the establishment of constrained risk parameters over the short term and the long term investment options. The strategy unit of ADIA plays a crucial role in determining the investment processes, approaches and options. The investment process is controlled and managed centrally by the strategy unit of ADIA and is responsible for developing, reviewing and maintaining the policies of the Authority so that the asset classes and investment options are clearly identified, categorized, managed and monitored. The policy portfolio mix of ADIA includes more than 30 asset classes and sub classes. The investment portfolio of ADIA is varied and heterogeneous in nature. However, the main strategy of the authority is to invest in a wide class of assets and financial instrument across different regions of the globe in order to generate maximum and stable returns and by being able to maintain the risk levels at controllable limits. The ADIA has also identified tactical opportunities for medium term investment options so that it can generate excess returns for the investment profiles. this adds value to the long term investment portfolio of the organization because the excess returns gained from the medium term investment options are added to the returns from the long term investments while at the same time maintaining the long term investment policy portfolio and the target risk profiles of the Authority (Sovereign Wealth Fund Institute, 2015, p.2). The governance structure of ADIA is prudent and in line with this, the Strategy Unit of the ADIA functions in a controlled manner. The recommendations of the Strategy Unit of ADIA are evaluated and assessed properly by the Strategy Committee of the Authority so that the validity, feasibility, benefits and risk factors associated with the investment recommendations are suitably assessed before the recommendations are presented before the Investment Decision making body of the ADIA. The final decisions related to the investments that are to be made by the ADIA across the globe are taken by the Managing Director of the Authority. However, before the recommendations and proposals reach the Managing Director of the Authority, they pass through a number of stages of scrutiny, feasibility analysis and evaluation (Abu Dhabi Investment Authority, 2014, p.1). After the approval of the investment decision department is received, the funds available within the ADIA are allocated to the different investment departments functioning under the authority. These investment departments are responsible for the implementation of the investment strategies and processes while maintaining the necessary level of compliance to the mandates of the functioning of the authority, the guidelines and benchmarks set for the operations of the ADIA. The investment portfolio of the ADIA includes a number of heterogeneous and mixed investment strategies and options like index replicating and passive strategies that it implements within bared quoted markets. The ADIA focuses on the execution of the investment activities in the desired assets by allocating them in a timely manner while maintaining the optimal level of transaction costs related to the investment choices. This is the main reason for the excessive use of passive strategies within the investment processes of the authority. The use of passive strategies is offset by the actively managed and carefully designed investment plan that are employed by the ADIA across a wide range of asset classes and sub classes so that the genuine potential for generating higher levels of market performances or alpha through the investments are adequately achieved by the authority (Yi-Chong and Gawdat, 2011, p.101). The ADIA has been a strong institutional investor in the real estate segment. The authority executes its investment plans into the real estate through the use of collaborative approaches like partnership and joint ventures with local experienced entities and also through the partnerships with third party managers who are responsible for conducting and managing the real estate investments on the behalf of the ADIA. The ADIA has recently invested USD 400 millions in the European real estate segment. In 2015, the authority has taken up a 14. 3 % stake in the Deutsche Annington which owns more than 19000 residential estates in Germany. Also, the ADA is financially backing the construction of the Mall of Switzerland in Lucerne with high investment values. These activities are taken up with the aim of seeking higher return values from the investments of the authority. Recommendation As per my opinion, the ADIA should concentrate on developing a robust, flexible and structured investment approach so as to ensure that the opportunities in the dynamic contemporary business world can be appropriately captured. This would ensure that the existing as well as the emerging opportunities in the globally integrated investment segment is targeted adequately and that the ADIA is able to maximize the benefits and returns from the investments through optimal investments made into different asset classes and also through the minimization of the risks associated with the different investment areas. ADIA should focus on expanding the in house resources and capabilities into a wider category of asset classes so that a mixed portfolio is created. This will enable the ADIA to hedge the risks associated with one class of financial investment options with the benefits of investing in another class of investment option. On viewing the investment activities of the ADIA on macro level, I have identified that the use of a wider asset class investment approach would help to enhance the capabilities of the organization to take up a globally integrated and strategic perspective of the different trends and opportunities across as well as within a wide category of asset classes and investment opportunities available in the global platform. This would also enable the ADIA to take up a more tactical, strategic and opportunistic approach towards the management of the investments in the background of high potential trends and opportunities (KPMG, 2013, p.14). ADIA should also focus on diversifying its investment portfolio further by building up its investment plans and strategies in a way that would not be based on particular geographical locations or asset classes but instead would extensively focus on the return drivers of the investments and act in a robust and flexible manner so that they can be modified according to the emerging needs and scopes of investment in the markets. Thus, a sophisticated approach would go a long way in providing the authority with an investment approach that would act on a granular and focused manner and would provide the authority with the scope and ability to concentrate on emerging and high return investment opportunities like the thematic and sector based investments which have inherent beneficial return and risk characteristics (Bauer, 2014, p.44). Conclusion In overall, the ADIA is employing a flexible and robust strategy of investment for employing its funds across different types of real estate investment options and at varied entry points within the capital structure of the respective markets. The core focus of the organization in the real estate and infrastructure segment is in assets which have strong market positions and stable cash flows. These include airports, toll roads, ports and railroads. The primary strategy of the organization is to acquire equity instruments by focusing on both developed and emerging markets across the globe. The ADIA has always taken up a disciplined approach and strategy towards their investment processes which can be enhanced suitably by employing innovative investment strategies and focusing on the emerging opportunities and trends in the developing markets and investment areas. References Abu Dhabi Investment Authority. 2014. Investment Strategy. Retrieved from http://www.adia.ae/En/Investment/Strategy.aspx. Bauer, A. 2014. Managing the public trust: How to make natural resource funds work for citizen. Retrieved from http://www.revenuewatch.org/sites/default/files/NRF_RWI_Complete_Report_EN.pdf. KPMG. 2013. Emerging trends in the Sovereign Wealth Fund landscape. Retrieved from http://www.kpmg.com/AE/en/Documents/2013/Emerging_trends_in_the_regional_SWF_landscape.pdf. Sovereign Wealth Fund Institute. 2015. Abu Dhabi Investment Authority Deploys Capital to European Real estate. Retrieved from http://www.swfinstitute.org/swf-article/abu-dhabi-investment-authority-deploys-capital-to-european-real-estate/. Yi-Chong., X. & Gawdat, B. 2011.  The Political Economy of Sovereign Wealth Funds: case studies of SWFs in China, Kuwait, Russia, the United Arab Emirates, and other countries. London: Palgrave Macmillan. Read More